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6 01 9 sy ll Ab us -2 INTERMEDIATE : pApER - opERATIoNs MANAgEMENT & sTRATEgIc MANAgEMENT sTuDy NoTEs The Institute of cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 INTERMEDIATE First Edition : August 2016 Reprint : January 2018 published by : Directorate of Studies The Institute of Cost Accountants of India (ICAI) CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in printed at : Jayant Printery LLP 352/54, Girgaum Road, Murlidhar Temple Compound, Mumbai - 400 002. Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof. syllabus - 2016 pApER 9: opERATIoNs MANAgEMENT & sTRATEgIc MANAgEMENT (oMsM) syllabus structure The syllabus comprises the following topics and study weightage: A Operations Management 70% B Strategic Management 30% b 30% A 70% AssEssMENT sTRATEgy There will be written examination paper of three hours. obJEcTIVE To provide an in depth study of the various business process, analyze operations, production planning and strategic management. learning Aims The syllabus aims to test the student’s ability to:       Understand the business process and analyze the operations Acquire knowledge of production planning and resource management Understand the concept of Corporate Vision - Mission and Objectives Understand the concept of SWOT and Portfolio Analysis Understand the different stages in strategy formulation process Understand the concept of Strategic Business Unit and Business Process re-enginnering skill set required Level B: Requiring the skill levels of knowledge, comprehension, application and analysis. section A : operations Management 1. Operations Management – Introduction 2. Operations Planning 3. Designing of Operational Systems and control 4. Production Planning and control 5. Productivity management and quality management 6. Project Management 7. Economics of Maintenance and Spares management section b : strategic Management 8. Strategic Management Introduction 9. Strategic Analysis and Strategic Planning 10. Formulation and Implementation of Strategy 70% 30% sEcTIoN A: opERATIoNs MANAgEMENT [70 MARks] 1. operation Management Introduction: Scope characteristics of modern operations functions - recent trends in production / operations management. 2. operations planning: Demand forecasting – capacity planning - capacity requirement planning - facility location - facility layout – Resource aggregate planning – Material requirements planning – Manufacturing resource planning – Economic Batch quantity. 3. Designing of operational systems and control: Product Design, Process design - Selection - Product Life Cycle – Process Planning – Process Selection. 4. production planning and control: Introduction – Control Measures – Time study, Work study, Method study, Job Evaluation, Job Allocation (Assignment Technique), Scheduling Queuing Models, Simulation and Line Balancing – Optimum Allocation of resources – Lean Operations – JIT – Transportation Model and Linear Programming Technique (Formulation of equations only). 5. productivity Management and Quality Management: Measurement techniques of productivity index, productivity of employee, productivity of materials, productivity of management resources, productivity of other factors – productivity improving methods – TQM basic tools and certiication – ISO standards basics. 6. project Management: Project planning – project life cycle – Gantt charts, PERT and CPM. 7. Economics of Maintenance and spares Management: Break down Maintenance – Preventive Maintenance – Routine Maintenance – Replacement of Machine – Spare Parts Management. section b: strategic Manangement [30 marks] 8. strategic Management Introduction Vision- Mission and objective 9. strategic Analysis and strategic planning Situational Analysis –SWOT Analysis – Portfolio Analysis – BCG Matrices – Stages in Strategic Planning – Alternatives in Strategic Planning 10. Formulation and Implementation of strategy: Strategy formulation function wise (Production Strategy, Marketing Strategy, Man Power Strategy) – Structuring of Organisation for implementation of strategy – Strategic Business Unit – Business Process re-engineering. contents study Note 1 : operation Management – Introduction 1.1 Operations Management - Introduction 1 1.2 Production Management vs. Operation Management 3 1.3 Characteristic of Modern Operation Function 4 1.4 Recent Trends in Production / Operations Management 4 study Note 2 : operations planning 2.1 Demand Forecasting 7 2.2 Capacity Planning 15 2.3 Capacity Requirement 17 2.4 Facility Location 21 2.5 Facility Layout 24 2.6 Resource Aggregate Planning 33 2.7 Material Requirements Planning 36 2.8 Manufacturing Resource Planning 37 2.9 Enterprise Resource Planning 38 2.10 Economic Batch Quantity 38 study Note 3 : Designing of operational system and control 3.1 Production Design 45 3.2 Process Design & Selection 48 3.3 Process Planning 48 3.4 Product Life Cycle 50 3.5 Process Selection 51 study Note 4 : production planning and control 4.1 Production Planning and Control Introduction 53 4.2 Time Study, Work Study, Method Study & Job Evaluation 56 4.3 Job Allocation – Assignment Technique 59 4.4 Scheduling 68 4.5 Queuing Models 73 4.6 Simulation 85 4.7 Line Balancing 95 4.8 Lean Operations 100 4.9 Just-In-Time (JIT) 100 4.10 Transportation Model 101 4.11 Linear Programming Technique 114 study Note 5 : productivity Management and Quality Management 5.1 Measurement Techniques of Productivity Index 137 5.2 TQM Basic Tools and Certiication 145 5.3 ISO Standard Basics 147 study Note 6 : project Management 6.1 Project Planning 151 6.2 Gantt Charts 155 6.3 PERT and CPM 160 study Note 7 : Economics of Maintenance and spares Management 7.1 Break Down Maintenance 175 7.2 Preventive Maintenance 175 7.3 Routine Maintenance 176 7.4 Replacement of Machine 178 7.5 Spare Parts Management 181 study Note 8 : strategic Management Introduction 8.1 Vission, Mission and Objective 209 study Note 9 : strategic Analysis and strategic planning 9.1 Situational Analysis 223 9.2 SWOT Analysis 224 9.3 Portfolio Analysis 227 9.4 BCG Matrices 228 9.5 Stages in Strategic Planning 235 9.6 Alternative in Strategic Planning 238 study Note 10 : Formulation and Implementation of strategy 10.1 Strategy Formulation Function-wise (Production Strategy, Marketing Strategy, Manpower Strategy 241 10.2 Structuring of Organisation for Implementation of Strategy 255 10.3 Strategic Business Unit 258 10.4 Business Process Re-engineering 260 study Note - 1 opERATIoNs MANAgEMENT – INTRoDucTIoN This study Note includes 1.1 operations Management - Introduction 1.2 production Management vs. operation Management 1.3 characteristic of Modern operation Function 1.4 Recent Trends in production/operations Management 1.1 opERATIoNs MANAgEMENT - INTRoDucTIoN Operations management is the management of that part of an organization that is responsible for producing goods and/or services. There are examples of these goods and services all around you. Every book you read, every video you watch, every e-mail you send, every telephone conversation you have, and every medical treatment you receive involves the operations function of one or more organizations. So does everything you wear, eat, travel in, sit on, and access the Internet with. However, in order to have a clear idea of Operations Management, one must have an idea of ‘Operating Systems’. An operating system is deined as a coniguration of resources combined for the provision of goods or services. Retail organizations, hospitals, bus and taxi services, tailors, hotels and dentists are all examples of operating systems. Any operating system converts inputs, using physical resources, to create outputs, the function of which is to satisfy customers wants. The creation of goods or services involves transforming or converting inputs into outputs. Various inputs such as capital, labour, and information are used to create goods or services using one or more transformation processes (e.g., storing, transporting, and cutting). To ensure that the desired output are obtained, an organization takes measurements at various points in the transformation process (feedback) and then compares with them with previously established standards to determine whether corrective action is needed (control). It is important to note that goods and services often occur jointly. For example, having the oil changed in your car is a service, but the oil that is delivered is a good. Similarly, house painting is a service, but the paint is a good. The goods-service combination is a continuum. It can range from primarily goods, with little service, to primarily service, with few goods. Because there are relatively few pure goods or pure services, companies usually sell product packages, which are a combination of goods and services. There are elements of both goods production and service delivery in these product packages. This makes managing operations more interesting, and also more challenging. obJEcTIVEs oF opERATIoNs MANAgEMENT Objectives of operations management can be categorised into (i) Customer service and (ii) Resource utilisation. (i) customer service The irst objective is the customer service for the satisfaction of customer wants. Customer service is therefore a key objective of operations management. The Operations Management must provide something to a speciication which can satisfy the customer in terms cost and timing. Thus, primary objective can be satisied by providing the ‘right thing at the right price at the right time’. These three aspects of customer service - speciication, cost and timing - are described in a little more detail for the four functions in Table 1. They are the principal sources of customer satisfaction and must, therefore, be the principal dimension of the customer service objective for operation managers. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 1 Operations Management – Introduction Table 1: Aspects of customer service principal customer wants principal function primary consideration Manufacture Goods of a given, requested acceptable speciication other consideration or Cost i.e. purchase price or cost of obtaining goods Timing, i.e. delivery delay from order or request to receipt of goods Transport Movement of a given, requested or Cost, i.e. cost of movement, Timing ,i.e. acceptable speciication (i) duration or time to move (ii) Supply Goods of a given, requested acceptable speciication wait, or delay from requesting to its commencement or Cost, that is purchase price or cost obtaining goods Timing, i.e. delivery delay from order or request to supply, to receipt of goods Service Treatment of a given, requested or Cost, i.e. cost of treatment acceptable speciication Timing, i.e. (i) Duration or timing required for treatment (ii) wait, or delay from requesting to its commencement Generally an organization will aim reliably and consistently to achieve certain standards, or levels, on these dimensions, and operations managers will be inluential in attempting to achieve these standards. Hence, this objective will inluence the operations manager’s decisions to achieve the required customer service. (ii) Resource utilization Another major objective is to utilize resources for the satisfaction of customer wants effectively, i.e., customer service must be provided with the achievement of effective operations through eficient use of resources. Ineficient use of resources or inadequate customer service leads to commercial failure of an operating system. Operations management is concerned essentially with the utilization of resources, i.e., obtaining maximum effect from resources or minimizing their loss, under utilization or waste. The extent of the utilization of the resources’ potential might be expressed in terms of the proportion of available time used or occupied, space utilization, levels of activity, etc. Each measure indicates the extent to which the potential or capacity of such resources is utilized. This is referred as the objective of resource utilization. Operations management is also concerned with the achievement of both satisfactory customer service and resource utilization. An improvement in one will often give rise to deterioration in the other. Often both cannot be maximized, and hence a satisfactory performance must be achieved on both objectives. All the activities of operations management must be tackled with these two objectives in mind, and many of the problems will be faced by operations managers because of this conlict. Hence, operations managers must attempt to balance these basic objectives. Below Table 2 summarizes the twin objectives of operations management. The type of balance established both between and within these basic objectives will be inluenced by market considerations, competitions, the strengths and weaknesses of the organization, etc. Hence, the operations managers should make a contribution when these objectives are set. Table 2 : The twin objectives of operations management The customer service objective. The resource utilization objective. To provide agreed/adequate levels of customer service To achieve adequate levels of resource utilization (and hence customer satisfaction) by providing goods (or productivity) e.g., to achieve agreed levels of or services with the right speciication, at the right cost utilization of materials, machines and labour. and at the right time. 2 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT scopE oF opERATIoN MANAgEMENT Operations Management concern with the conversion of inputs into outputs, using physical resources, so as to provide the desired utilities to the customer while meeting the other organizational objectives of effectiveness, eficiency and adoptability. It distinguishes itself from other functions such as personnel, marketing, inance, etc. by its primary concern for ‘conversion by using physical resources’. Following are the activities, which are listed under Production and Operations Management functions: 1. Location of facilities. 2. Plant layouts and Material Handling. 3. Product Design. 4. Process Design. 5. Production and Planning Control. 6. Quality Control. 7. Materials Management. 8. Maintenance Management. location of Facilities plant layout & Material Handling Maintenance Management Materials management production operations Management product Design process Design Quality control production planning and control Fig. 1 : scope of production and operations management 1.2 pRoDucTIoNs MANAgEMENT vs opERATIoNs MANAgEMET There are two points of distinction between production management and operations management. First, the term production management is more used for a system where tangible goods are produced. Whereas, operations management is more frequently used where various inputs are transformed into intangible services. Viewed from this perspective, operations management will cover such service organisations as banks, airlines, utilities, pollution control agencies, super bazaars, educational institutions, libraries, consultancy irms and police departments, in addition, of course, to manufacturing enterprises. The second distinction relates to the evolution of the subject. Operations management is the term that is used nowadays. Production management precedes operations management in the historical growth of the subject. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 3 Operations Management – Introduction 1.3 cHARAcTERIsTIc oF MoDERN opERATIoNs FuNcTIoN The production management of today presents certain characteristics which make it look totally different from what it was during the past. Speciically, today’s production system is characterised by at least four features. 1. Manufacturing as competitive Advantage In the past production was considered to be like any other function in the organisation. WhefT demand was high and production capacities were inadequate, the concern was to somehow muster all inputs and use them to produce goods which would be grabbed by -narket. But today’s scenario is contrasting. Plants have excess capacities, competition is mounting and irms look and gain competitive advantage to survive and succeed. Interestingly, aroduction system offers vast scope to gain competitive edge and irms intend to exploit the potential. Total Quality Management (TQM), Time-Based Competition, Business Process Re-engineering (BPRE), Just-in-Time (JIT), Focused Factory, Flexible Manufacturing Systems (FMS), Computer Integrated Manufacturing (CIM), and The Virtual Corporation are but only some techniques which the companies are employing to gain competitive advantage. 2. services orientation As was stated earlier, service sector is gaining greater relevance these days. The production system, therefore, needs to be organised keeping in mind the peculiar requirements of the service component. The entire manufacturing needs to be geared to serve (i) intangible and perishable nature of the services, (ii) constant interaction with clients or customers, (iii) small volumes of production to serve local markets, and (iv) need to locate facilities to serve local markets. There is increased presence of professionals on the production, instead of technicians and engineers. 3. Disappearance of smokestacks Protective labour legislation, environmental movement and gradual emergence of knowledge based organisations have brought total transformation in the production system. Today’s factories are aesthetically designed and built, environment friendly - in fact, they are homes away from homes. Going to factory everyday is no more excruciating experience, it is like holidaying at a scenic spot. A visit to ABB, L & T or Smith Kline and Beecham should convince the reader about the transformation that has taken place in the wealth creation system. 4. small has become beautiful It was E.F. Schumacher who, in his famous book Small is Beautiful, opposed giant organisations and increased specialisation. He advocated, instead, intermediate technology based on smaller working units, community ownership, and regional workplaces utilising local labour and resources. For him, small was beautiful. Businessmen, all over the world, did not believe in Schumacher’s philosophy. Inspired by economies of scale, industrialists went In for huge organisations and mass production systems. 1.4 REcENT TRENDs IN pRoDucTIoN/opERATIoNs MANAgEMENT Recent trends in production/operations management relate to global competition and the impact it has on manufacturing irms. Some of the recent trends are : 1. global Market place : Globalisation of business has compelled many manufacturing irms to have operations in many countries where they have certain economic advantage. This has resulted in a steep increase in the level of competition among manufacturing irms throughout the world. 2. production/operations strategy : More and more irms are recognising the importance of production/ operations strategy for the overall success of their business and the necessity for relating it to their overall business strategy. 3. Total Quality Management (TQM) : TQM approach has been adopted by many irms to achieve customer satisfaction by a never-ending quest for improving the quality of goods and services. 4. Flexibility : The ability to adapt quickly to changes in volume of demand, in the product mix demanded, and in product design or in delivery schedules, has become a major competitive strategy and a competitive advantage to the irms. This is sometimes called as agile manufacturing. 4 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 5. Time Reduction : Reduction of manufacturing cycle time and speed to market for a new product provide competitive edge to a irm over other irms. When companies can provide products at the same price and quality, quicker delivery (short lead times) provide one irm competitive edge over the other. 6. Technology : Advances in technology have led to a vast array of new products, new processes and new materials and components. Automation, computerisation, information and communication technologies have revolutionised the way companies operate. Technological changes in products and processes can have great impact on competitiveness and quality, if the advanced technology is carefully integrated into the existing system. 7. Worker Involvement : The recent trend is to assign responsibility for decision making and problem solving to the lower levels in the organisation. This is known as employee involvement and empowerment. Examples of worker involvement are quality circles and use of work teams or quality improvement teams. 8. Re-engineering : This involves drastic measures or break-through improvements to improve the performance of a irm. It involves the concept of clean-slate approach or starting from scratch in redesigning the business processes. 9. Environmental Issues : Today’s production managers are concerned more and more with pollution control and waste disposal which are key issues in protection of environment and social responsibility. There is increasing emphasis on reducing waste, recycling waste, using less-toxic chemicals and using biodegradable materials for packaging. 10. corporate Downsizing (or Right sizing) : Downsizing or right sizing has been forced on irms to shed their obesity. This has become necessary due to competition, lowering productivity, need for improved proit and for higher dividend payment to shareholders. 11. supply-chain Management : Management of supply-chain, from suppliers to inal customers reduces the cost of transportation, warehousing and distribution throughout the supply chain. 12. lean production : Production systems have become lean production systems which use minimal amounts of resources to produce a high volume of high quality goods with some variety. These systems use lexible manufacturing systems and multi-skilled workforce to have advantages of both mass production and job production (or craft production). OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 5 Operations Management – Introduction 6 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT study Note - 2 opERATIoNs plANNINg This study Note includes 2.1 Demand Forecasting 2.2 capacity planning 2.3 capacity Reqirement 2.4 Facility location 2.5 Facility layout 2.6 Resource Aggregate planning 2.7 Material Requirements planning 2.8 Manufacturing Resource planning 2.9 Enterprise Resource planning 2.10 Economic batch Quantity 2.1 DEMAND FoREcAsTINg Forecasting Forecasting means peeping into the future. As future is unknown and is anybody’s guess but the business leaders in the past have evolved certain systematic and scientiic methods to know the future by scientiic analysis based on facts and possible consequences. Thus, this systematic method of probing the future is called forecasting. In this way forecasting of sales refers to an act of making prediction about future sales followed by a detailed analysis of facts related to future situations and forces which may affect the business as a whole. Foresight is not the whole of management, but at least it is an essential part of management and accordingly, to foresee in this context means both to assess the future and make provisions for it, that is forecasting is itself action already. Forecasting as a kind of future picture wherein proximate events are outlined with some distinctness, while remote events appear progressively less distinct and it entails the running of the business as foresee and provide means to run the business over a deinite period. As far as the marketing manager is concerned the sales forecast is an estimate of the amount of unit sales for a speciied future period under the proposed marketing plan or program. It may also be deined as an estimate of sales in rupees of physical units for a speciied future period under a proposed marketing plan or program and under an assumed set of economic and other force outside the organisation for which the forecast is made. When we consider the function of production and operations management, no doubt Production and Operation departments will produce goods as per the sales program given by the sales department, but it has to prepare forecast regarding machine capacity required, materials required and time required for production and so on. This needs the knowledge of what exactly happened in the production shop in previous periods. Making of a proper forecast requires the assessment of both controllable and uncontrollable factors (both economic and non economic) inside and outside the organisation. All business and industrial activities revolve around the sale and its future planning. To know what a business will do we must know its future sales. So, sales forecasting is the most important activity in the business because all other activities depend upon the sales of the concern. Sales forecasting as a guiding factor for a irm because it enables the irm to concentrate its efforts to produce the required quantities, at the right time at reasonable price and of the right quality. Sales forecasting is the basis of planning the various activities i.e.; production activities, pricing policies, programme policies and strategies, personnel policies as to recruitment, transfer, promotion, training, wages etc. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 7 Operations Planning The period of forecasting, that is the time range selected for forecasting depends on the purpose for which the forecast is made. The period may vary from one week to some years. Depending upon the period, the forecast can be termed as ‘Short range forecasting’, medium range forecasting’ and ‘Long range forecasting’. ‘Short range forecasting period may be one week, two weeks or a couple of months. Medium range forecasting period may vary from 3 to 6 months. Long range forecasting period may vary from one year to any period. The objective of above said forecast is naturally different. In general, short term forecasting will be of more useful in production planning. The manager who does short range forecast must see that they are very nearer to the accuracy. In long range forecast, the normal period used is generally 5 years. In some cases it may extends to 10 to 15 years also. The purpose of long range forecast is: (i) To work out expected capital expenditure for future developments or to acquire new facilities, (ii) To determine expected cash low from sales, (iii) To plan for future manpower requirements, (iv) To plan for material requirement, (v) To plan for Research and Development. Here much importance is given to long range growth factor. In case of medium range forecasting the period may extend over to one or two years. The purpose of this type of forecasting is: (i) To determine budgetary control over expenses, (ii) To determine dividend policy, (iii) To ind and control maintenance expenses, (iv) To determine schedule of operations, (v) To plan for capacity adjustments. In case of short-term forecast, which extends from few weeks to three or six months and the following purposes are generally served: (i) To estimate the inventory requirement, (ii) To provide transport facilities for inished goods, (iii) To decide work loads for men and machines, (iv) To ind the working capital needed, (v) To set-up of production run for the products, (vi) To ix sales quota, (vii) To ind the required overtime to meet the delivery promises. Everyone who use the forecast for one purpose or the other expects that they need that forecast should be accurate. But it is practically impossible to forecast accurately. But decisions are made everyday to run the business by using the best information available with them. Management scientists have developed various methods for forecasting. One has to decide which method has to be used to suit the information available with him and to suit his needs. The manager, who is concerned with forecasting, must have knowledge of factors inluencing forecast. Various factors that inluence the forecast are: (i) Environmental changes, (ii) Changes in the preference of the user, (iii) Number of competitive products, (iv) Disposable income of the consumer. 8 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT In forecasting the production important factors to be considered are: (i) Demand from the marketing department, (ii) Rate of labours absenteeism, (iii) Availability of materials, (iv) Available capacity of machines, (v) Maintenance schedules, (vi) Delivery date schedules. steps in forecasting Whatever may be the method used for forecasting, the following steps are followed in forecasting. (a) Determine the objective of forecast: What for you are making forecast? Is it for predicting the demand? Is it to know the consumer’s preferences? Is it to study the trend? You have to spell out clearly the use of forecast. (b) select the period over which the forecast will be made? Is it long-term forecast or medium-term forecast or short-term forecast? What are your information needs over that period? (c) select the method you want to use for making the forecast. This method depends on the period selected for the forecast and the information or data available on hand. It also depends on what you expect from the information you get from the forecast. Select appropriate method for making forecast. (d) gather information to be used in the forecast. The data you use for making forecasting to produce the result, which is of great use to you. The data may be collected by: (i) primary source: This data we will get from the records of the irm itself. (ii) secondary source: This is available from outside means, such as published data, magazines, educational institutions etc. (e) Make the forecast: Using the data collected in the selected method of forecasting, the forecast is made. Forecasting Methods: Methods or techniques of sales forecasting: Different authorities on marketing and production have devised several methods or techniques of sales or demand forecasting. The sales forecasts may be result of what market people or buyers say about the product or they may be the result of statistical and quantitative techniques. The most common methods of sales forecasting are: 1. Survey of buyer’s inventions or the user’s expectation method: Under this system of sales forecasting actual users of the product of the concern are contacted directly and they are asked about their intention to buy the company’s products in an expected given future usually a year. Total sales forecasts of the product then estimated on the basis of advice and willingness of various customers. This is most direct method of sales forecasting. The chief advantages of this method are: (i) Sales forecast under this method is based on information received or collected from the actual users whose buying actions will really decide the future demand. So, the estimates are correct. (ii) It provides a subjective feel of the market and of the thinking behind the buying intention of the actual uses. It may help the development of a new product in the market. (iii) This method is more appropriate where users of the product are numbered and a new product is to be introduced for which no previous records can be made available. (iv) It is most suitable for short-run forecasting. 2. Collective opinion or sales force composite method: Under this method, views of salesmen, branch manager, area manager and sales manager are secured for the different segments of the market. Salesmen, being close to actual users are required to estimate expected sales in their respective territories and sections. The estimates of individual salesmen are then consolidated to ind out the total estimated sales for the coming session. These estimates are then further examined by the successive executive levels in the light of various factors like proposed changes in product design, advertising and selling prices, competition etc. before they are inally emerged for forecasting. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 9 Operations Planning 3. Group executive judgement or executive judgement method: This is a process of combining, averaging or evaluating, in some other way, the opinions and views of top executives. Opinions are sought from the executives of different ields i.e., marketing; inance; production etc. and forecasts are made. 4. Experts’ opinions: Under this method, the organisation collects opinions from specialists in the ield outside the organisation. Opinions of experts given in the newspapers and journals for the trade, wholesalers and distributors for company’s products, agencies or professional experts are taken. By analysing these opinions and views of experts, deductions are made for the company’s sales, and sales forecasts are done. 5. Market test method: Under this method seller sells his product in a part of the market for sometimes and makes the assessment of sales for the full market on the bases of results of test sales. This method is quite appropriate when the product is quite new in the market or good estimators are not available or where buyers do not prepare their purchase plan. 6. Trend projection method: Under this method, a trend of company’s or industry’s sales is ixed with the help of historical data relating to sales which are collected, observed or recorded at successive intervals of time. Such data is generally referred to as time series. The change in values of sales is found out. The study may show that the sales sometimes are increasing and sometimes decreasing, but a general trend in the long run will be either upward or downward. It cannot be both ways. This trend is called secular trend. The sales forecasts with the help of this method are made on the assumption that the same trend will continue in the future. The method which is generally used in itting the trend is the method of least squares or straight line trend method. With this method a straight line trend is obtained. This line is called ‘line of best it’. By using the formula of regression equation of Y on X, the future sales are projected. calculation of trend. The trend can be calculated by the least square method as follows: (i) Find time deviations (X) of each period from a certain period and then ind the sum of time deviation (∑X). (ii) Square the time deviation of each period (X2) and then ind the sum of squares of each period (∑X2). (iii) Multiply time deviations with the sales of each period individually (XY) and add the product of the column to ind (∑XY). (iv) To ind the trend (Y) this is equal to a + bX. The value of a and b may be determined by either of the following two ways: (a) Direct method. This method is applicable only when ∑X = 0. To make ∑X = 0, it is necessary that the time deviations should be calculated exactly from the mid point of the series. Then, the values of a and b will be calculated as follows: a (average) ∑ and b (rate of growth) = ∑ XY X2 This method is simple and direct. (b) Indirect method. This method is somewhat dificult. This method can be applied in both the cases where ∑X has any positive or negative values or ∑X is not equal to zero. The values of a and b are calculated by solving the following two equations: ∑Y = na + b∑X ∑XY = a∑X + b∑X2 By calculating the values of a and b in the above manner, the sales can be forecasted for any future period by applying the formula Y = a + bX. 7. Moving average method: This is another statistical method to calculate the trend through moving averages. It can be calculated as follows: An appropriate period is to be determined for which the moving average is calculated. While determining the period for moving averages, the normal cycle time of changes in the values of series should be considered so that short-term luctuations are eliminated. As far as possible, the period for moving averages should be in odd numbers such as period of 3, 5 or 7 years. The period in even numbers will create a problem in centralising the values of averages. The calculated values of moving averages present the basis for determining the expected amount of sale. 10 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 8. Criteria of a good forecasting method: It cannot be said which method of sales forecasting is the best because everyone has merits and demerits of its own. The suitability of a method depends on various factors such as nature of theproduct, available time and past records, wealth and energy, degree of accuracy and the forecaster etc. of an enterprise. However, in general, a good forecasting method must possess the following qualiications. (i) Accuracy: Accuracy of the forecasting igures is the life blood of the business because many important plans and programmes, policies andstrategies are prepared and followed on the basis of such estimates. If sales forecasts are wrong, the businessman suffer a big loss. Hence, the method of forecasting to be applied must amount to maximum accuracy. (ii) Simplicity: The method for forecasting should be very simple. If the method is dificult or technical, then there is every possibility of mistake. Some information are collected from outside and that will remain unanswered or inaccurate replies will be received, if the method is dificult. Management must also be able to understand and have conidence in the method. (iii) Economy: The method to be used should be economical taking into account the importance of the accuracy of forecast. Costs must be (iv) Availability: The method should be such for which the relevant information may be available immediately with reasonable accuracy. Moreover, the technique must give quick results and useful information to the management. (v) Stability: The data of forecasting should be such wherein the future changes are expected to be minimum and are reliable for future planning for sometime. (vi) Utility: The forecasting technique must be easily understandable and suitable to the management. Illustration 1. From the following time series data of sale project the sales for the next three years. Year Sales (`000 units) 2001 2002 2003 2004 2005 2006 2007 80 90 92 83 94 99 92 solution: computation of Trend Values years Time Deviation from 2004 X –3 –2 –1 0 +1 +2 +3 ∑X = 0 2001 2002 2003 2004 2005 2006 2007 n=7 sales in (`000 units) y 80 90 92 83 94 99 92 ∑Y = 630 squares of time dev. X² 9 4 1 0 1 4 9 ∑X² = 28 product of time deviations and sales Xy –240 –180 –92 0 +94 +198 +276 ∑XY = + 56 Regression equation of Y on X Y = a + bX To ind the values of a and b a= ∑Y = b= ∑ XY = ∑X n 2 630 = 90 7 56 =2 28 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 11 Operations Planning Hence regression equation comes to Y = 90 + 2X. With the help of this equation we can project the trend values for the next three years, i.e. 2008, 2009 and 2010. Y2008 = 90 + 2(4) = 90 + 8 = 98 (000) units. Y2009 = 90 + 2(5) = 90 + 10 = 100 (000) units. Y2010 = 90 + 2(6) = 90 + 12 = 102 (000) units. Illustration 2. With the help of following data project the trend of sales for the next ive years: years sales (in lakhs) 2002 100 2003 110 2004 115 2005 120 2006 135 2007 140 solution: computation of trend values of sales Time deviations from the middle of 2004 and 2005 assuring 5 years = 1 sales (in lakh `) squares of time deviation product of time deviation and sales X y X2 Xy 2002 -5 100 25 -500 2003 -3 110 9 -330 2004 -1 115 1 -115 year 2005 +1 120 1 +120 2006 +3 135 9 +405 2007 +5 140 25 +700 n=6 ΣX = 0 ΣY = 720 ΣX² = 70 ΣXY = 280 Regression equation of Y on X: Y = a + bX To ind the values of a and b a= ∑Y = b= ∑ XY ∑X n 2 720 = 120 6 = 280 =4 70 Sales forecast for the next years, i.e., 2008 to 2012 Y2008 = 120 + 4 (+7) = 120 + 28 = ` 148 lakhs Y2009 = 120 + 4 (+9) = 120 + 36 = ` 156 lakhs Y2010 = 120 + 4 (+11) = 120 + 44 = ` 164 lakhs. Y2011 = 120 + 4 (+13) = 120 + 52 = ` 172 lakhs. Y2012 = 120 + 4 (+15) = 120 + 60 = ` 180 lakhs. 12 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Illustration 3. An investigation into the demand for colour TV sets in 5 towns has resulted in the following data: Population of the town (in lakhs) No of TV sets demanded (in thousands) X: Y: 5 9 7 13 8 11 11 15 14 19 Fit a linear regression of Y on X and estimate the demand for CTV sets for two towns with a population of 10 lakhs and 20 lakhs. solution: computation of trend values population (in lakhs) sales of cTV (in thousands) squares of the population product of population and sales of colour TV X 5 Y X² XY 9 25 45 7 13 49 91 8 11 64 88 11 15 121 165 14 19 196 266 ΣX = 45 Σy = 67 ΣX² = 455 ΣXY = 655 Regression equation of Y on X Y = a + bX To ind the values of a and b, the following two equations are to be solved ΣY = na + bΣX ... (i) ΣXY = aΣX + bΣX 2 ... (ii) By putting the values we get 67 = 5a + 45b ... (iii) 655 = 45a + 455b ... (iv) Multiplying equation (iii) by 9 and putting it as no. (v) we get, 603 = 45a + 405b ... (v) By deducting equation (v) from equation (iv); we get 52 = 50b b= 52 = 1.04 50 By putting the value of b in equation (iii), we get 67 = 5a + 45 × 1.04 or, 67 = 5a + 46.80 or, 67-46.80 = 5a or, 5a = or, a = or a = 20.20 20.20 5 4.04 Now by putting the values of a, b and X (10 lakhs) in regression equation of Y on X, we get, Y = a + bX OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 13 Operations Planning or, Y = 4.04 + 1.04 (10) or, Y = 4.04 + 10.40 or 14.44 thousand CTV sets. Similarly sales estimates for town having population of 20 lakhs, by putting the values of X, a and b in regression equation can be found as Y = 4.04 + 1.04 (20) = 4.04 + 20.80 = 24.84 thousands CTV sets. Hence expected demand for CTV for two towns will be 14.44 thousand and 24.84 thousand CTV sets. Illustration 4. An investigation into the use of scooters in 5 towns has resulted in the following data: Population in town Population in town (in lakhs) (X) 4 6 7 10 13 No. of scooters (Y) 4,400 6,600 5,700 8,000 10,300 Fit a linear regression of Y on X and estimate the number of scooters to be found in a town with a population of 16 lakhs. solution: computation of trend value population (in lakhs) X No. of scooters demanded Y squares of population X² product of population and No. of scooters demanded XY 4 4,400 16 17,600 6 6,600 36 39,600 7 5,700 49 39,900 10 8,000 100 80,000 13 10,300 169 1,33,900 ΣX = 40 ΣY = 35,000 ΣX² = 370 ΣXY = 3,11,000 Regression equation of Y on X Y = a + bX To ind the values of a and b we will have to solve the following two equations ΣY = na + bΣX ... (i) ΣXY = aΣX + bΣX2 ....(ii) By putting the values, we get 35,000 = 5a + 40b ... (iii) 3,11,000 = 40a + 370b ... (iv) By multiplying equation no. (iii) by 8 putting as equation (v) we get, 2,80,000 = 40a + 320b ... (v) By subtracting equation (v) from equation (iv), we get 31,000 = 50b or, 50b = or, b = 31,000 31000 = 620 50 14 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT By substituting the value of b in equation no. (iii), we get 35,000 = 5a + 40b or 35,000 = 5a + 40 × 620 or 35,000 = 5a + 24,800 or 10,200 = get Y = a + bX or, Y = 2040 + 620 (16) or Y = 2040 + 9920 or Y = 11,960 5a 10200 or a = = 2040 5 Now putting the value of a, b and X (16 lakhs) in regression equation of Y on X, we Hence, the expected demand of scooters for a town with a population of 16 lakhs will be 11,960 scooters. 2.2 cApAcITy plANNINg capacity planning: The effective management of capacity is the most important responsibility of production and operations management. The objective of capacity management i.e., planning and control of capacity is to match the level of operations to the level of demand. Capacity planning is concerned with inding answers to the basic questions regarding capacity such as: (i) What kind of capacity is needed? (ii) How much capacity is needed? (iii) When this capacity is needed? Capacity planning is to be carried out keeping in mind future growth and expansion plans, market trends, sales forecasting, etc. Capacity is the rate of productive capability of a facility. Capacity is usually expressed as volume of output per period of time. Capacity planning is required for the following: • Suficient capacity is required to meet the customers demand in time, • Capacity affects the cost eficiency of operations, • Capacity affects the scheduling system, • Capacity creation requires an investment, • Capacity planning is the irst step when an organisation decides to produce more or new products. Capacity planning is mainly of two types: (i) long-term capacity plans which are concerned with investments in new facilities and equipments. These plans cover a time horizon of more than two years. (ii) short-term capacity plans which takes into account work-force size, overtime budgets, inventories Capacity refers to the maximum load an operating unit can handle. The operating unit might be a plant, a department, a machine, a store or a worker. Capacity of a plant is the maximum rate of output (goods or services) the plant can produce. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 15 Operations Planning The production capacity of a facility or a irm is the maximum rate of production the facility or the irm is capable of producing. It is usually expressed as volume of output per period of time (i.e., hour, day, week, month, quarter etc.). Capacity indicates the ability of a irm to meet market demand - both current and future. Effective capacity can be determined by the following factors: Facilities - design, location, layout and environment. Product - Product design and product-mix. Process - Quantity and quality capabilities. Human factors - Job content, Job design, motivation, compensation, training and experience of labour, learning rates and absenteeism and labour turn over. Operational factors - Scheduling, materials management, quality assurance, maintenance policies, and equipment break-downs. External factors - Product standards, safety regulations, union attitudes, pollution control standards. Measurement of capacity Capacity of a plant is usually expressed as the rate of output, i.e., in terms of units produced per period of time (i.e., hour, shift, day, week, month etc.). But when irms are producing different types of products, it is dificult to use volume of output of each product to express the capacity of the irm. In such cases, capacity of the irm is expressed in terms of money value (production value) of the various products produced put together. capacity planning Decisions Capacity planning involves activities such as: (i) Assessing the capacity of existing facilities. (ii) Forecasting the long-range future capacity needs. (iii) Identifying and analysing sources of capacity for future needs. (iv) Evaluating the alternative sources of capacity based on inancial, technological and economical considerations. (v) Selecting a capacity alternative most suited to achieve strategic mission of the irm. Capacity planning is necessary when an organisation decides to increase its production or introduce new products into the market or to increase the volume of production to gain the advantages of economies of scale. Once the existing capacity is evaluated and a need for new or expanded facilities is determined, decisions regarding the facility location and process technology selection are undertaken. When the long-range capacity needs are estimated through long-range forecasts for products, a irm may ind itself in one of the two following situations: (i) A capacity shortage situation where present capacity is not enough to meet the forecast demand for the product. (ii) An excess or surplus capacity situation where the present capacity exceeds the expected future demand. Factors affecting determination of plant capacity (i) Capital investment required, (ii) Changes in product design, process design, market conditions and product life cycles, (iii) Flexibility for capacity additions, (iv) Level of automation desired, (v) Market demand for the product, 16 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (vi) Product obsolescence and technology obsolescence and (vii) Type of technology selected. Forms of capacity planning: Based on time-horizon (i) Long-term capacity planning and (ii) Short-term capacity planning Based on amount of resources employed (i) Finite capacity planning and (ii) Ininite capacity planning Factors Affecting Capacity Planning: Two kinds of factors affecting capacity planning are: (i) Controllable Factors: amount of labour employed, facilities installed, machines, tooling, shifts of work per day, days worked per week, overtime work, subcontracting, preventive maintenance and number of production set ups. (ii) Less Controllable Factors: absenteeism, labour performance, machine break-downs, material shortages, scrap and rework, strike, lock-out, ire accidents etc. 2.3 cApAcITy REQuIREMENT Capacity Requirement Planning : Capacity requirement planning (CRP) is a technique which determines what equipment and labour/personnel capacities are required to meet the production objectives (i.e., volume of products) as per the master production schedule and material requirement planning (MRP-I). capacity Requirement planning strategies: Two types of capacity planning strategies used are: (i) “level capacity” plan and (ii) “Matching capacity with demand” plan. Level capacity plan is based in “produce-to-stock and sell” approaches wherein the production systems are operated at uniform production levels and inished goods inventories rise and fall depending upon whether production level exceeds demand or vice versa from time period to time period (say every quarter “Matching capacity with demand” Plan: In this plan, production capacity is matched with the demand in each period (weekly, monthly or quarterly demand). Usually, material lows and machine capacity are changed from quarter to quarter to match the demand. The main advantages are low levels of inished goods inventory resulting in lesser inventory carrying costs. Also, the back-ordering cost is also reduced. The disadvantages are high labour and material costs because of frequent changes in workforce (hiring, training and lay-off costs, overtime or idle time cost or subcontracting costs). Optimum Plant Capacity: Plant capacity has a great inluence on cost of production with increasing volume of production, economies of scale arises which results in reduction in average cost per unit produced. For a given production facility, there is an optimum volume of output per year that results in the least average unit cost. This level of output is called the “best operating level” of the plant. As the volume of output increases outward from zero in a particular production facility, average unit costs fall. These declining costs are because of the following reasons: (i) Fixed costs are spread over more units produced, (ii) Plant construction costs are less, (iii) Reduced costs of purchased material due to quantity discounts for higher volume of materials purchased and (iv) Cost advantages in mass production processes. Longer production runs (i.e., higher batch quantity of products produced) have lesser setup cost per unit of product produced, lesser scrap etc., resulting in savings which will reduce the cost of production per unit. This is referred to as “economies of scale”. But this reduction in per unit cost will be only upto certain volume of production. Additional volumes of OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 17 Operations Planning outputs beyond this volume results in ever-increasing average unit production cost. This increase in cost per unit arise from increased congestion of materials and workers, which decreases eficiency of production, and due to other factors such as dificulty in scheduling, damaged products, reduced employee morale due to excessive work pressure, increased use of overtime etc., resulting in “diseconomies of scale”. Hence, the plant capacity should be such that the optimum level of production which gives the minimum average cost of production per unit should be possible. This plant capacity is referred to as optimum plant capacity. Balancing the Capacity: In irms manufacturing many products (a product line or a product-mix) the load on different machines and equipments vary due to changes in product-mix. When the output rates of different machines do not match with the required output rate for the products to be produced, there will be an imbalance between the work loads of different machines. This will result in some machine or equipment becoming a “bottleneck work centre” thereby limiting the plant capacity which wills in-turn increase the production costs per unit. To overcome problem of imbalance between different machines, additional machines or equipments are added to the bottleneck work-centre to increase the capacity of the bottle-neck work centre to match with the capacity of other work centres. Adding new machines or equipments to bottleneck work centres to remove the imbalance in capacity between various work centres is found to be economical than giving excessive overtime to workers working in bottle-neck centres which increases production costs. Another method to remove imbalance is to subcontract excess work load of bottleneck centres to outside vendors or subcontractors. Another way to balance capacities is to try to change the productmix by manipulating the sales for different products to arrive at a suitable product-mix which loads all work centres almost uniformly. Implications of plant capacity There are two major cost implications of plant capacity: (i) Changes in output of an existing plant of certain installed capacity affect the production costs. (ii) Changes in the plant capacity by changing the size of a plant have signiicant effects on costs. Factors inluencing Effective Capacity The effective capacity is inluenced by – (1) Forecasts of demand, (2) Plant and labour eficiency, (3) Subcontracting, (4) Multiple shift operation, (5) Management policies. Forecasts of demand: Demand forecast is going to inluence the capacity plan in a signiicant way. As such, it is very dificult to forecast the demand with accuracy as it changes signiicantly with the product life-cycle stage, number of products. Products with long lifecycle usually exhibit steady demand growth compared to one with shorter life-cycle. Thus the accuracy of forecast inluences the capacity planning. Plant and labour eficiency: It is dificult to attain 100 per cent eficiency of plant and equipment. The eficiency is less than 100 percent because of the enforced idle time due to machine breakdown, delays due to scheduling and other reasons. The plant eficiency varies from equipment to equipment and from organisation to organisation. Labour eficiency contributes to the overall capacity utilisation. The standard time set by industrial engineer is for a representative or normal worker. But the actual workers differ in their speed and eficiency. The actual eficiency of the labour should be considered for calculating eficiency. Thus plant and labour eficiency are very much essential to arrive at realistic capacity planning. Subcontracting: Subcontracting refers to off loading, some of the jobs to outside vendors thus hiring the capacity to meet the requirements of the organisation. A careful analysis as to whether to make or to buy should be done. An economic comparison between cost to make the component or buy the component is to be made to take the decision. Multiple shift operation: Multiple shifts are going to enhance the irm’s capacity utilisation. But especially in the third shift the rejection rate is higher. Specially for process industries where investment is very high it is recommended to have a multiple shifts. Management policy: The management policy with regards to subcontracting, multiplicity of shifts (decision regarding how many shifts to operate), which work stations or departments to be run for third shift, machine replacement policy, etc., are going to affect the capacity planning. 18 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Factors favouring over capacity and under capacity It is very dificult to forecast demand as always there is an uncertainty associated with the demand. The forecasted demand will be either higher or lower than the actual demand. So always there is a risk involved in creating capacity based on projected demand. This gives rise to either over capacity or under capacity. The over capacity is preferred when: (a) Fixed cost of the capacity is not very high. (b) Subcontracting is not possible because of secrecy of design and/or quality requirement. (c) The time required to add capacity is long. (d) The company cannot afford to miss the delivery, and cannot afford to loose the customer. (e) There is an economic capacity size below which it is not economical to operate the plant. The under capacity is preferred when: (b) Shortage of products does not affect the company (i.e., lost sales can be compensated). (c) The technology changes fast, i.e., the rate of obsolescence of plant and equipment are high. (d) The cost of creating the capacity is prohibitively high. Illustration 5. A department works on 8 hours shift, 250 days a year and has the usage data of a machine, as given below: product Annual demand (units) processing time (standard time in hours) X 300 4.0 Y 400 6.0 Z 500 3.0 Determine the number of machines required. solution: step 1: Calculate the processing time needed in hours to produce product x, y and z in the quantities demanded using the standard time data. product Annual demand (units) standard processing per unit (Hrs.) processing needed (Hrs.) X 300 4.0 300 x 4 = 1200 Hrs. Y 400 6.0 400 x 6 = 2400 Hrs. Z 500 3.0 500 x 3 = 1500 Hrs. Total = 5100 Hrs step 2 : Annual production capacity of one machine in standard hours = 8 × 250 = 2000 hours per year step 3 : Number of machines required = Work load per year 5100 = = 2.55 machines = 3 machines. Production capacity per machine 2000 Illustration 6. A steel plant has a design capacity of 50,000 tons of steel per day, effective capacity of 40,000 tons of steel per day and an actual output of 36,000 tons of steel per day. Compute the eficiency of the plant and its utilisation. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 19 Operations Planning solution: Actual output Eficiency of the plant = Actual output 36000  = × 100 = 90% Effective Capacity  40000  Actual output   36000  Utilisation =  = × 100 = 72%  Design Capacity   50000  Illustration 7. A irm has four work centres, A, B, C & D, in series with individual capacities in units per day shown in the igure below. Work centres Actual Raw Output materials (300) A B C D (300) (360) (340) (400) (i) Identify the bottle neck centre. (ii) What is the system capacity? (iii) What is the system eficiency? solution: (i) The bottle neck centre is the work centre having the minimum capacity. Hence, work centre ‘C’ is the bottleneck centre. (ii) System capacity is the maximum units that are possible to produce in the system as a whole. Hence, system capacity is the capacity of the bottle neck centre i.e., 340 units. (iii) System eficiency = Actual output System capacity 300 = × 100 (i.e., maximum possible output) = 88.23% 340 Illustration 8. A manager has to decide about the number of machines to be purchased. He has three options i.e., purchasing one, or two or three machines. The data are given below. Number of machine Annual ixed cost One ` 12,000 0 to 300 Two ` 15,000 301 to 600 Three ` 21,000 601 to 900 corresponding range of output Variable cost is ` 20 per unit and revenue is ` 50 per unit (a) Determine the break-even point for each range (b) If projected demand is between 600 and 650 units how many machines should the manager purchase? solution: (i) Break-even point Let QBEP be the break even point. FC = Fixed cost, R = Revenue per unit, VC = Variable cost 20 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Then QBEPR = FC + (VC) QBEP QBEP = FC (R − VC) Let Q1 be the break-even-point for one machine option Then, Q1= 12000 12000 = = 400 units 30 (50 − 20) (Not within the range of 0 to 300) Let Q2 be the break-even-point for two machines option. Then, Q2 = 15000 15000 = = 500 units 30 (50 − 20) (within the range of 301 to 600) Let Q3 be the break-even-point for three machines option. Then, Q3 = 21000 21000 = = 700 units 30 (50 − 20 (with in the range of 601 to 900) (ii) The projected demand is between 600 to 650 units. The break even point for single machine option (i.e., 400 units) is not feasible because it exceeds the range of volume that can be produced with one machine (i.e., 0 to 300). Also, the break even point for 3 machines is 700 units which is more than the upper limit of projected demand of 600 to 650 units and hence not feasible. For 2 machines option the break even volume is 500 units and volume range is 301 to 600. Hence, the demand of 600 can be met with 2 machines and proit is earned because the production volume of 600 is more than the break even volume of 500. If the manager wants to produce 650 units with 3 machines, there will be loss because the break even volume with three machines is 700 units. Hence, the manager would choose two machines and produce 600 units. 2.4 FAcIlITy locATIoN Plant location may be understood as the function of determining where the plant should be roeaied for maximum operating economy and effectiveness. The selection of a place for locating a plant is one of the problems, perhaps the most important, which is faced by an entrepreneur while launching a new enterprise. A selection on pure economic considerations will ensure an easy and regular supply of raw materials, labour force, eficient plant layout, proper utilisation of production capacity and reduced cost of production. An ideal location may not, by itself, guarantee success; but it certainly contributes to the smooth and eficient working of an organisation. A bad location, on the other hand, is a severe handicap for any enterprise and it inally bankrupts it. It is, therefore, very essential that utmost care should be exercised in the initial stages to select a proper place. Once a mistake is made in locating a plant it becomes extremely dificult and costly to correct it. steps in location selection To be systematic, in choosing a plant location, the entrepreneur would do well to proceed step by step, the steps beinfc 1. Within the country or outside; 2. Selection of the region; 3. Selectior of the locality or community; 4. Selection of the exact site. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 21 Operations Planning 1. Deciding on Domestic or International location The irst step in plant location is to decide whether the facility should be located domestically or internationally. A few years ago, this factor would have received little consideration. But with increasing internationalisation of business, the issue of home or foreign country’ is gaining greater relevance. If the management decides on foreign location, the next logical step would be to decide upon a particular country for location. This is necessary because, countries across the world are vying with each other to attract foreign investments. The choice of a particular country depends on such factors as political stability, export and import auotas, currency and exchange rates, cultural and economic peculiarities, and natural or physical conditions. 2. selection of Region The selection of a particular region out of the many natural regions of a country is the second step in plant location. The following factors inluence such selection: (i) Availability of Raw Materials As a manufacturing unit is engaged in the conversion of raw materials into inished products, it is very essential that it should be located in a place where the supply of raw materials is assured at minimum transport cost. The sugar industry, the paper industry, the iron and steel industry, the industries engaged in the solvent extraction of oil from rice bran, the China clay washery, factories manufacturing low tension porcelain insulators, and the like should be located near the sources of their raw materials. The heavy concentration of the sugar industry in Bihar and Uttar Pradesh is due to the fact that these two States are the leading producers of sugarcane in the country. Nearness to raw materials offers such advantages as: (a) Reduced cost of transportation; (a) Regular and proper supply of materials uninterrupted by transportation breakdowns; and (c) Savings in the cost of storage of materials. (ii) Nearness to the Market Since goods are produced for sale, it is very essential that the factory should be located near their market. A reduction in the cost of transporting inished goods to the market; the ability to adjust the production programme to suit the likes and dislikes of consumers; the ability to render prompt service to the consumers, provide after-sale services, and execute replacement orders without delay - these are some of the advantages that accrue to the entrepreneur if he/she establishes his/her factory near his market. (iii) Availability of power Power is essential to move the wheels of an industry. Coal, electricity, oil and natural gas are the sources of power. Where coal is the source of power, as in the case of the iron and steel industry, the factory has to be located near the coal ields. Examples of such industries are: the iron and steel industry in Germany, in Pennsylvania in the U.S.A. and in Jamshedpur in India. (iv) Transport Facilities While making a study of a location, an entrepreneur considers the question of the availability of transport facilities. Transport facilities are essential for bringing raw materials and men to the factory and for carrying the inished products from the factory to the market. A place which is well connected rail, road and water transport is ideal for a plant location. It may be said that industry follows transportation. In other words, places with well-developed means of transport attract industries^ln extreme cases, transport may follow industries. For instance, if a public sector unit is started in a remote place, the Government will naturally provide transport facilities to cater to the requirements of the unit. But, generally speaking a place with existing transport facilities is perfect for locating a plant. (v) suitability of climate The climate has its own importance in the location of a plant because of two reasons. First, there are certain industries which, because of the nature of their production, require particular climatic conditions; for example, 22 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT humid climate for cotton textiles and jute. Such industries have to be located in places where humid climatic conditions are available. This explains why the cotton textile industry is concentrated in Mumbai and the jute textile industry in Kolkota. (vi) government policy The inluence of Government policies and programmes on plant location is apparent in every country, particularly in planned economies like ours. In the name of balanced regional development, many backward regions in India have been selected for the location of new industries, which would generate the regions economy and on a larger canvas, the national economy. The Government of India has been inluencing plant location in a number of ways. Some of these are: Licensing policy; Freight rate policy; Establishing a unit in the public sector in a remote area and developing it to attract other industries; Institutional inance and government subsidies. 3. selection of community Selecting a particular locality or community in a region is the third step in plant location. The selection of a locality in a particular region is inluenced by the following factors: (i) Availability of labour Despite the talk of mechanisation and automation, the importance of labour on the industrial side has not been completely lost. Labour is an important factor in the production of goods. An adequacy of labour supply at reasonable wages is very essential for the smooth and successful working of an organisation. (ii) civic Amenities for Workers Besides good working conditions inside the factory, the employees require certain facilities outside it. Recreation facilities, such as clubs, theatres and parks, must be provided for the employees. They require schools for their children. A place which abounds in all these facilities will naturally be preferred to another place which lacks them. (iii) Existence of Complementary and Competing Industries The existence of complementary industries is favourable to the location of industries because an industrial unit, in association with other units, can get the following beneits: • An industrial unit, in collaboration with other similar units, can secure materials on better terms than it can do it by itself. The concentration of such similar establishments helps to increase the variety of materials that can be offered by suppliers. (iv) Availability of Water and Fire-ighting Facilities Some industries require a plentiful supply of water for their working. Some of these are: fertilizer units, rayon manufacturing units, absorbent cotton manufacturing units, leather tanneries, bleaching, dyeing and screen printing units. These factories must be located in places where water is available in abundance. Water may be obtained from the local authority, from the canal, from a river or a lake, or by sinking a boreweli. In any case, the supply of water should be considered with respect to its regularity, cost and purity. 4. selection of the site The selection of an exact site in a chosen locality is the fourth step in plant location. The selection of the site is inluenced by the following considerations: soil, size and Topography For factories producing engineering goods, the fertility or otherwise of the soil may not be a factor inluencing plant location. But for agro-based industries, a fertile soil is necessary for ensuring a strategic plant location. The area of the land should be such as to accommodate not only the existing manufacturing facilities, but offer scope for future expansion programmes as well. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 23 Operations Planning 2.5 FAcIlITy lAyouT Plant Layout, also known as layout of facility refers to the coniguration of departments, work-centres and equipment and machinery with focus on the low of materials or work through the production system. Plant layout or facility layout means planning for location of all machines, equipments, utilities, work stations, customer service areas, material storage areas, tool servicing areas, tool cribs, aisles, rest rooms, lunch rooms, coffee/tea bays, ofices, and computer rooms and also planning for the patterns of low of materials and people around, into and within the buildings. Layout planning involves decisions about the physical arrangement of economic activity centres within a facility. An economic activity centre can be anything that consumes space, a person or group of people, a machine, a work station, a department, an aisle, a store room and so on. The goal or layout planning is to allow workers and equipments to operate more effectively. The questions to be addressed in layout planning are: • How much space and capacity does each centre need? • How should each center’s space be conigured? • What centres should the layout include? • Where should each centre be located? The location of a centre has two dimensions: • Absolute location or the particular space that the centre occupies within the facility. • Relative location i.e., the placement of a centre relative to other centers. The importance of layout decisions: The need for layout planning arises both in the process of designing new plants and the redesigning existing plants or facilities. Most common reasons for design of new layouts are: (i) Layout is one of the key decisions that determine the long-run eficiency in operations. (ii) Layout has many strategic implications because it establishes an organisation’s competitive priorities in regard to capacity, processes, lexibility and cost as well as quality of work life, customer contact and image (in case of service organisations). (iii) An effective layout can help an organisation to achieve a strategic advantage that supports differentiation, low cost, fast response or lexibility. (iv) A well designed layout provides an economic layout that will meet the irm’s competitive requirements. Need for redesign of layout arises because of the following reasons: • Accidents, health hazards and low safety, • Changes in environmental or legal requirements, • Changes in processes, methods or equipments, • Changes in product design/service design, • Changes in volume of output or product-mix changes, • Ineficient operations (high cost, bottleneck operations), • Introduction of new products/services, • Low employee morale. 24 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT good plant layout- objectives: • Eficient utilisation of labour reduced idle time of labour and equipments, • Higher lexibility (to change the layout easily), • Higher utilisation of space, equipment and people (employees), • Improved employee morale and safe working conditions, • Improved low of materials, information and people (employees), • Improved production capacity, • Reduced congestion or reduced bottleneck centers, • Reduced health hazards and accidents, • To allow ease of maintenance, • To facilitate better coordination and face-to-face communication where needed, • To improve productivity, • To provide ease of supervision, • To provide product lexibility and volume lexibility, • To utilise available space eficiently and effectively. choices of layout: Layout choices can help greatly in communicating an organisation’s product plans and competitive priorities. Layout has many practical and strategic implications. Altering a layout can affect an organisation and how well it meets its competitive priorities by: • Facilitating the low of materials and information, • Improving communication, • Improving employee morale, • Increasing customer convenience and sales (in service organisations such as retail stores), • Increasing the eficient utilisation of labour and equipment, • Reducing hazards to employees. The type of operations carried out in a irm determines the layout requirements. Some of the fundamental layout choices available to managers are: • Whether to plan the layout for the current or future needs? • Whether to select a single-story or multistory building design? • What type of layout to choose? • What performance criteria to emphasise? Factors inluencing layout choices: Primarily the layout of a plant is inluenced by the relationship among materials, machinery and men. Other factors inluencing layout are type of product, type of workers, the type of industry, management policies etc. Some of these factors are discussed in detailed below: • Location: The size and type of the site selected for the plant, inluences the type of buildings (single story or multi story) which in turn inluences the layout design. Also, the location of the plant determines the mode of transportation from and into the plant (such as by goods trains, truck, or ships) and the layout should provide facilities for mode of transport used. Also, the layout should provide for storage of fuel, raw materials, future expansion needs, power generation requirements etc. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 25 Operations Planning • Machinery and Equipments: The type of product, the volume of production, type of processes and management policy on technology, determines the type of machines and equipments to be installed • Managerial Policies: regarding volume of production, provision for future expansion, extent of automation, make-or-buy decisions, speed of delivery of goods to customers, purchasing and inventory policies and personnel policies inluence the plant layout design. • Materials: Plant layout includes provision for storage and handling of raw materials, supplies and components used in production. The type of storage areas, racks, handling equipments such as cranes, trolleys, conveyors or pipelines etc., used - all depend on the type of materials used - such as solid, liquid, light, heavy, bulky, big, small etc. • Product: The type of product i.e., whether the product is light or heavy, big or small, liquid or solid etc., it inluences the type of layout. For example, Ship building, Aircraft assembly, Locomotive assembly etc., requires a layout type different from that needed to produce refrigerators, cars, scooters, television sets, soaps, detergents, soft drinks etc. The manufacturing process equipments and machines used and the processing steps largely depend on the nature of the product and hence the layout design depends, very much on the product. Type of Industry: Type of Industry Process I is intermittent type of industry C is continuous type of industry Whether the industry is classiied under (a) Synthetic, (b) Analytical, (c) Conditioning and (d) Extraction industries and again whether the industry has intermittent production or continuous production has a relevance to the type of layout employed. • Workers : The gender of employees (men or women), the position of employees while working (i.e., standing or sitting), employee facilities needed such as locker rooms, rest rooms, toilets, canteens, coffee/tea bays etc., are to be considered while designing the plant layouts. plant layout- principles: The layout selected in conformity with layout principles should be an ideal one. These principles are:• Principle of Minimum Travel: Men and materials should travel the shortest distance between operations so as to avoid waste of labour and time and minimise the cost of materials handling. • Principle of Sequence: Machinery and operations should be arranged in a sequential order. This principle is best achieved in product layout, and efforts should be made to have it adopted in the process layout. • Principle of Usage: Every unit of available space should be effectively utilised. This principle should • Principle of Compactness: There should be a harmonious fusion of all the relevant factors so that the inal layout looks well integrated and compact. 26 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT • Principle of Safety and Satisfaction: The layout should contain built in provisions for safety for the workmen. It should also be planned on the basis of the comfort and convenience of the workmen so that they feel satisied. • Principle of Flexibility: The layout should permit revisions with the least dificulty and at minimum cost. • Principle of Minimum Investment: The layout should result in savings in ixed capital investment, not by avoiding installation of the necessary facilities but by an intensive, use of available facilities. Types of layout: A layout essentially refers to the arranging and grouping of machines which are meant to produce goods. Grouping is done on different lines. The choice of a particular line depends on several factors. The methods of grouping or the types of layout are: (i) Process layout or functional layout or job shop layout; (ii) Product layout or line processing layout or low-line layout; (iii) Fixed position layout or static layout; (iv) Cellular manufacturing (CM) layout or Group Technology layout and (v) Combination layout or Hybrid layout. process layout: Also called the functional layout, layout for job lot manufacture or batch production layout, the process layout involves a grouping together of similar machines in one department. For example, machines performing drilling operations are installed in the drilling department; machines performing turning operations are grouped in the turning department; and so on. In this way, there would be an electroplating department, a painting department, a machining departments and the like, where similar machines or equipments are installed in the plants which follow the process layout. The process arrangement is signiied by the grouping together of like machines based upon their operational characteristics. For example, centre lathes will be arranged in one department, turret lathes in a second department, and milling machines in a third departments. A quantity of raw material is issued to a machine which performs the irst operation. This machine may be situated anywhere in the factory. For the next operation, a different machine may be required, which may be situated in another part of the factory. The material should be transported to the other machine for the operation. Thus, material would move long distances and along crisscrossing paths. At one stage, the material may be taken to a separate building, say, for heat treatment, and then brought back for grinding. If machines in one department are engaged, the partly inished product awaiting operations may be taken to the store and later reissued for production. Partly inished goods would be waiting for processing in every department, like commuters waiting for buses in a city. Machines in each department attend to any product that is taken to them. These machines are, therefore, called general purpose machines. Work has to be allotted to each department in such a way that no machine in any department is idle. In a batch production layout, machines are chosen to do as many different jobs as possible, i.e., the emphasis is on general purpose machines. The work which needs to be done is allocated to the machines OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 27 Operations Planning according to loading schedules, with the objective of ensuring that each machine is fully loaded. The process layout carries out the functional idea of Taylor and from the historical point of view, process layout precedes product layout. This type of layout is best suited for intermittent type of production. While grouping machines according to the process type, certain principles must be kept in mind. These are: • Convenience for inspection. • Convenience for supervision. Process layout may be advantageously used in light and heavy engineering industries, made-to-order furniture industries and the like. • The distance between departments needs to be as short as possible with a view to avoiding longdistance movement of materials. • Though similar machines are grouped in one department, the departments themselves should be located in accordance with the principle of sequence of operations. For example, in a steel plant, the operations are smelting, casting; rolling etc. These different departments may be arranged in that order to avoid crossovers and backtracking of materials. product layout: Also called the straight-line layout or layout for serialised manufacture, the product layout involves the arrangement of machines in one line depending upon the sequence of operations. Material is fed into the irst machine and inished products come out of the last machine. In between, partly inished goods move from machine to machine, the output of one machine becoming the input for the next. In a sugar mill, sugar cane, fed at one end of the mill comes out as sugar at the other end. Similarly, in paper mill, bamboos are fed into the machine at one end and paper comes out at the other end. In product layout, if there are more than one, line of production, there are as many, lines of machines. The emphasis here, therefore, is on special purpose machines in contrast to general purpose machines, which are installed in the process layout. Consequently, the investment on machines in a straight line layout is higher than the investment on machines in a functional layout. Lathe Raw material in Comonent 1 Drilling Grinding (Finished) Comonent 1 Cutting Lathe Drilling Plating Comonent 2 Comonent 2 Product out Cutting Lathe Gear cutting Comonent 3 Grinding Comonent 3 Figure of Product Layout The grouping of machines should be done, on product line, keeping in mind the following principles: • All the machine tools or other types of equipment must be placed at the point demanded by the sequence of operations. • All the operations, including assembly, testing and packing should be, included in the line. • Materials may be fed where they are required for assembly but not necessarily all at one point; and • There should be no points where one line crosses another line; The product layout may be advantageously followed in plants manufacturing standardised products on a mass scale such as chemical, paper, sugar, rubber, reineries and cement industries. 28 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Layout in the form of Fixed Position: As the term itself implies, the ixed position layout involves the movement of men and machines to the product which remains stationary. In this type of layout, the material or major component remains in a ixed location, and tools, machinery and men as well as other pieces of material are brought to this location. The movement of men and machines to the product is advisable because the cost of moving them would be less than the cost of moving the product which is very bulky. Also called static layout, this type is followed in the manufacture, if bulky and heavy products, such as locomotives, ships, boilers, air crafts and generators. Product (Ship) Ship Assembly Material Machine Men Tools Tools To be moved towards the material Mixed Layout or Combined Layout The application of the principles of product layout, process layout or ixed location layout in their strict meanings is dificult to come across. A combination of the product and process layouts, with an emphasis on either, is noticed in most industrial establishments. Plants are never laid out in either pure form. It is possible to have both types of layout in an eficiently combined form if the products manufactured are somewhat similar and not complex. Component low in combined layout layout of service Facility: The fundamental difference between service facility and manufacturing facility layouts is that many service facilities exist to bring together customers and services. Service facility layouts should provide for easy entrance to these facilities from freeways and busy thoroughfares. Large, well organized and amply lighted parking areas and well designed walkways to and from parking areas are some of the requirements of service facility layouts. Because of different degree of customer contact, two types of service facility layouts emerge, viz., those that are almost totally designed around the customer receiving and servicing function (such as banks) and those that are designed around the technologies, processing of physical materials and production eficiency (such as hospitals). OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 29 Operations Planning other facilities with reference to plant layout: A plant layout involves, besides the grouping of machinery, an arrangement for other facilities as well. Such facilities include receiving and shipping points, inspection facilities, employee facilities and storage. Not all the facilities are required in every plant. The requirements depend on the nature of the product which is manufactured in a particular plant. Importance of layout: The importance of a layout can be described as under: • Avoidance of Bottlenecks: Bottlenecks refer to any, place in a production process where materials tend to pile up or produced at rates of speed less rapid than the previous or subsequent operations. Bottlenecks are caused by inadequate machine capacity, inadequate storage space or low speed on the part of the operators. The results of bottlenecks are delays in production schedules, congestion, accidents and wastage of loor area. All these may be overcome with an eficient layout. • Avoidance of Unnecessary and Costly Changes: A planned layout avoids frequent changes which are dificult and costly. The incorporation of lexibility elements in the layout would help in the avoidance of revisions. • Better Production Control: Production control is concerned with the production of a product of the right type at the right time and at reasonable cost. A good plant layout is a requisite of good production control and provides the plant control oficers with a systematic basis upon which to build organisation and procedures. • Better Supervision: A good plant layout ensures better supervision in two ways: (a) Determining the number of workers to be handled by a supervisor and (b) Enabling the supervisor to get a full view of the entire plant at one glance. A good plant layout is, therefore, the irst step in good supervision. • Economies in Handling: Nearly 30 per cent to 40 per cent of the manufacturing costs are accounted for by materials handling. Every effort should, therefore, be made to cut down en this cost. Long distance movements should be avoided and speciic handling operations must he eliminated. • Effective Use of Available Area: Every unit of the plant area is valuable, especially in urban areas. Efforts should be therefore, be made to make use of the available area by planning the layout properly. • Improved Employee Morale: Employee morale is achieved when workers are cheerful and conident. This state of mental condition is vital to the success of any organisation. Morale depends on better working conditions; better employee facilities; reduced number of accidents; and increased earnings. • Improved Quality Control: Timely execution of orders will be meaningful when the quality of the output is not below expectations. To ensure quality, inspection should be conducted at different stages of manufacture. An ideal layout provides for inspection to ensure better quality control. • Improved Utilisation of Labour: A good plant layout is one of the factors in effective utilisation of labour. It makes possible individual operations, the process and low of materials handling in such a way that the time of each worker is effectively spent on productive operations. • Minimisation of Production Delays: Repeat order and new customers will be the result of prompt execution of orders. Every management should try to keep to the delivery schedules. • Minimum Equipment Investment: Investment on equipment can be minimised by planned machine balance and location, minimum handling distances, by the installation of general purpose machines and by planned machine loading. A good plant layout provides all these advantages. Illustration 9. The present layout is shown in the igure. The manager of the department is intending to interchange the departments C and F in the present layout. The handling frequencies between the departments is given. All the departments are of the same size and coniguration. The material handling cost per unit length travel between departments is same. What will be the effect of interchange of departments C and F in the layout? 30 A C E B D F OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT From / To A b c D E F A – 0 90 160 50 0 B – – 70 0 100 130 C – – 20 0 0 D – – – _ 180 10 – – – – 40 E F – – – – – – From / To A b c D E F 1 1 2 2 3 2 1 3 2 1 1 2 solution: A B C D (ii) 2 1 E 1 F – Computation of total cost matrix (combining the inter departmental material handling frequencies and distance matrix. From / To A A b c D E F Total 0 90 320 100 0 510 140 0 300 260 700 20 0 0 20 10 370 40 40 B C D 360 E F – Total 1,640 If the departments are interchanged, the layout will be represented as shown below. A F E B D C The distance matrix and the cost matrix are represented as shown. From / To A B A b c D E F 1 3 2 2 1 2 1 3 2 1 1 2 2 1 C D E 1 F OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 31 Operations Planning Total cost matrix for the modiied layout. From / To A B C D E F Total A – b 0 c 270 140 D 320 0 20 E 100 300 0 360 F 0 260 0 10 40 Total 690 700 20 370 40 – 1,820 The interchange of departments C and F increases the total material handling cost. Thus, it is not a desirable modiication. Illustration 10. A defence contractor is evaluating its machine shops current process layout. The igure below shows the current layout and the table shows the trip matrix for the facility. Health and safety regulations require departments E and F to remain at their current positions. E B F A C D current layout From / To A B C D E F A b 8 - c 3 D E 9 F 5 8 9 3 3 - 3 - Can layout be improved? Also evaluate using load distance (ld) score. solution: Keep the departments E and F at the current locations. Because C must be as close as possible to both E and F, put C between them. Place A directly south of E, and B next to A. All of the heavy trafic concerns have been accommodated. Department D is located in the remaining place. The proposed layout is shown in igure below. The load distance (ld) scores for the existing and proposed layout are shown below. As Id score for proposed layout is less, the proposed layout indicates improvement over existing. E C F A B D proposed layout 32 Dept. pair No. of Trips (1) A–B A–C A–E A–F B–D C– E C–F D–F E–F Total 8 3 9 5 3 8 9 3 3 Existing plan Distance load × Distance (2) (1 x 2) 16 2 3 1 9 1 15 3 6 2 16 2 18 2 3 1 6 2 92 proposed plan Distance load × Distance (3) (1 x3) 8 1 6 2 9 1 15 3 3 1 8 1 9 1 3 1 6 2 67 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 2.6 REsouRcEs AggREgATE plANNINg Aggregate planning: Aggregate planning is an intermediate term planning decision. It is the process of planning the quantity and timing of output over the intermediate time horizon (3 months to one year). Within this range, the physical facilities are assumed to be ixed for the planning period. Therefore, luctuations in demand must be met by varying labour and inventory schedule. Aggregate planning seeks the best combination to minimise costs. Production planning in the intermediate range of time is termed as ‘Aggregate Planning’. It is thus called because the demand on facilities and available capacities is speciied in aggregate quantities. For example aggregate quantities of number of Automobile vehicles, Aggregate number of soaps etc. Here the total expected demand is speciied without regard to the product mix that makes up the speciied igure. While dealing with production problems, the planning process is normally divided in three categories. (i) Long range Planning which deals with strategic decisions such as purchase of facilities, introduction of new products, processes etc. (ii) Short term planning which deals with day-to-day work, scheduling and sometimes inventory problems. (iii) Intermediate Planning or Aggregate Planning, which is in between long range and short term planning, which is concerned in generally acceptable planning taking the load on hand and the facilities available into considerations. In aggregate planning the management formulates a general strategy by which capacity can be made to satisfy demand in a most economical way during a speciic moderate time period, say for one year. The aggregate planning is made operational through a master schedule that gives the manufacturing schedule (Products and dates of manufacture). Generally, day-to-day schedules are prepared from master schedule. Facility planning and scheduling has got very close relationship with aggregate planning. Aggregate planning strategies: The variables of the production system are labour, materials and capital. More labour effort is required to generate higher volume of output. Hence, the employment and use of overtime (OT) are the two relevant variables. Materials help to regulate output. The alternatives available to the company are inventories, back ordering or subcontracting of items. These controllable variables constitute pure strategies by which luctuations in demand and uncertainties in production activities can be accommodated. Vary the size of the workforce: Output is controlled by hiring or laying off workers in proportion to changes in demand. Vary the hours worked: Maintain the stable workforce, but permit idle time when there is a ‘slack’ and permit overtime (OT) when demand is ‘peak’. Vary inventory levels: Demand luctuations can be met by large amount of inventory. Subcontract: Upward shift in demand from low level. Constant production rates can be met by using Aggregate planning guidelines: 1. Determine corporate policy regarding controllable variables. 2. Use a good forecast as a basis for planning. 3. Plan in proper units of capacity. 4. Maintain the stable workforce. 5. Maintain needed control over inventories. 6. Maintain lexibility to change. 7. Respond to demand in a controlled manner. 8. Evaluate planning on a regular basis. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 33 Operations Planning properties of Aggregate planning: To facilitate the production manager the aggregate planning must have the following characteristics: (i) Both out put and sales should be expressed in a logical overall unit of measuring. For example, an automobile manufacturing can say 1000 vehicles per year, without giving the number of each verity of vehicle. Similarly a paint industry can say 10,000 litres of paint and does not mention the quantities of each colour. (ii) Acceptable forecast for some reasonable planning period, say one year. (iii) A method of identiication and ixing the relevant costs associated with the plant. Availability of alternatives for meeting the objective of the organization. Ability to construct a model that will permit to take optimal or near optimal decisions for the sequence of planning periods in the planning horizon. (iv) Facilities that are considered ixed to carry out the objective. Illustration 11. ABC. Co. has developed a forecast for the group of items that has the following demand pattern Quarter Demand cumulative demand 1 270 270 2 220 490 3 470 960 4 670 1630 5 450 2080 6 270 2350 7 200 2550 8 370 3920 The irm estimates that it costs ` 150 per unit to increase production rate ` 200 per unit to decrease the production rate, ` 50 per unit per quarter to carry the items in inventory and `100 per unit if subcontracted. Compare the costs of the pure strategies. solution: Different pure strategies are plan I In this pure strategy, the actual demand is met by varying the work force size. This means that during the period of low demand, the company must ire the workers and during the period of high demand the company must hire workers. These two steps involve associated costs. In this strategy, the production units will be equal to the demand and values in each period. The cost of the plan is computed in the table below, Quarter Demand cost of increasing production level (`) cost of decreasing production level (`) Total cost of plan (`) 1 270 — — — 2 220 — 50 x 200 = 10,000 10,000 3 470 250 x 150 = 37,500 — 37,500 4 670 200 x 150 = 30,000 — 30,000 5 450 — 220 x 200 = 44,000 44,000 6 270 — 180 x 200 = 36,000 36,000 7 200 — 70 x 200 = 14,000 14,000 370 170 x 150 = 25,500 — 8 Total 34 25,500 1,97,000 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT plan II In this plan, the company computes the average demand and sets its production capacity to this average demand. This results in excess of units in some periods and also shortage of units during some other periods. The excess units will be carried as inventory for future use and shortage of units can be fulilled using future inventory. The cost of the plan II is computer in the table. The plan incurs a maximum shortage of 255 units during 5 periods. The irm might decide to carry 255 units from the beginning of period 1 to avoid shortage. The total cost of the plan is ` 96,000. Quarter Demand forecast cumu lative demand production level cumu. prod. level Inventory Adjusted inventory with 255 at beginning of period 1 cost of holding inventory (`) 1 270 270 365 365 95 350 17,500 2 220 490 365 730 240 495 24,750 3 470 960 365 1095 135 390 19,500 4 670 1630 365 1460 –170 85 4,250 5 450 2080 365 1825 –255 0 0 6 270 2350 365 2190 –160 95 4,750 7 200 2550 365 2555 5 260 13,000 8 370 2920 365 2920 0 255 12,750 Total 96,500 plan III The additional demand other than the normal capacity is met by subcontracting. The cost of the plan III amounts to ` 1,32,000 as shown in table below. Quarter Demand forecast production units subcontract units Incremental cost @ ` 100/units 1 270 200 70 70 x 100 = 7,000 2 220 200 20 20 x 100 = 2,000 3 470 200 270 270 x 100 = 27,000 4 670 200 470 470 x 100 = 47,000 5 450 200 250 250 x 100 = 25,000 6 270 200 70 70 x 100 = 7,000 7 200 200 0 0 8 370 200 170 170 x 100 = 17,000 Total = 1,32,000 The total cost of pure strategies is given below. On observation Plan II (Changing inventory levels) has the least cost. plan Total cost (`) Plan I 1,97,000 Plan II 96,500 Plan III 1,32,000 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 35 Operations Planning 2.7 MATERIAl REQuIREMENTs plANNINg Material requirement planning (MRP) refers to the basic calculations used to determine component requirements from end item requirements. It also refers to a broader information system that uses the dependence relationship to plan and control manufacturing operations. MRP is a technique of working backward from the scheduled quantities and needs dates for end items speciied in a master production schedule to determine the requirements for components needed to meet the master production schedule. The technique determines what components are needed, how many are needed, when they are needed and when they should be ordered so that they are likely to be available as needed. The MRP logic serves as the key component in an information system for planning and controlling production operations and purchasing. The information provided by MRP is highly useful in scheduling because it indicates the relative priorities of shop orders and purchase orders. “Materials Requirement Planning (MRP) is a technique for determining the quantity and timing for the acquisition of dependent demand items needed to satisfy master production schedule requirements.” MRP is one of the powerful tools that, when applied properly, helps the managers in achieving effective manufacturing control. MRp objectives: 1. Inventory reduction: MRP determines how many components are required, when they are required in order to meet the master schedule. It helps to procure the materials/components as and when needed and thus avoid excessive build up of inventory. 2. Reduction in the manufacturing and delivery lead times: MRP identiies materials and component quantities, timings when they are needed, availabilities and procurements and actions required to meet delivery deadlines. MRP helps to avoid delays in production and priorities production activities by putting due dates on customer job orders. 3. Realistic delivery commitments: By using MRP, production can give marketing timely information about likely delivery times to prospective customers. 4. Increased eficiency: MRP provides a close coordination among various work centres and hence helps to achieve uninterrupted low of materials through the production line. This increases the eficiency of production system. Functions served by MRp 1. order planning and control: When to release orders and for what quantities of materials. 2. priority planning and control: How the expected date of availability is compared to the need date for each component. 3. Provision of a basis for planning capacity requirements and developing a broad business plans. Advantages and Disadvantages of MRp Advantages : (i) Reduced inventory, (ii) Reduced idle time, (iii) Reduced set up time, (iv) Ability to change the master production schedule, (v) Ability to price more competitively, (vi) Better customer service, (vii) Better response to market demands, 36 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (viii) Reduced sales price. In addition the MRp system enables the following: (i) Aids capacity planning, (ii) Helps managers to use the planned schedule before actual release orders, (iii) Tells when to expedite or deexpedite, (iv) Delays or cancels orders, (v) Changes order quantities, (vi) Advances or delays order due dates. Disadvantages : Even though MRP system has many advantages, there are some problems with MRP systems which make them fail in many irms. Three major causes for failures of an MRP system are: (i) Lack of top management commitment. MRP must be accepted by top management as a planning tool with speciic reference to proit results. All executives concerned with the implementation of the MRP system must be educated emphasizing the importance of MRP as a closed-loop, integrated strategic planning tool. (ii) MRP was presented and perceived as a complete and stand-alone system to run a irm, rather than as part of the total system. (iii) The issue of how MRP can be made to function with just-in-time production system. MRP also needs a high degree of accuracy for operation, which often requires (i) changing how the irm operates and (ii) updating iles. The major complaint by users of MRP is that MRP is too rigid because when MRP develops a schedule, it is quite dificult to deviate from the schedule if need arises. 2.8 MANuFAcTuRINg REsouRcEs plANNINg Manufacturing Resource Planning (MRP II) has been developed by manufacturing mar^gerrto address the planning and controlling of a manufacturing process and all of its related support functions. It encompasses logically correct planning and control activities related to materials, capacity, inance, engineering, sales and marketing. MRP II is universally applicable to any manufacturing organization regardless of its size, location, product or process. MRp II is a management process for taking the business plan and breaking it down into speciic, detailed tasks that people evaluate, agree upon and are held accountable for. It involves all departments viz., materials department, engineering department that must maintain bill of materials, sales/marketing department that must keep sales plan upto date, purchasing and manufacturing departments that must meet due dates for bought out items and in-house manufactured items respectively. From MRp I to MRp II : Manufacturing resource planning (MRP II) is a natural outgrowth of Materials Requirement Planning (MRP I) Whereas MRP I focuses upon priorities of materials, CRP is concerned with time. Both material and time requirement are integrated within the MRP system [i.e., MRP I). Beyond this, MRP II has been coined to ‘close the loop’ by integrating inancial, accounting, personnel, engineering and marketing information along with the production planning and control activities of basic MRP systems. MRP II is the heart of corporate management information system for many manufacturing irms. Evolution of MRp II The earlier resource requirement planning systems were quite simple and unsophisticated. The MRP technique was used for its most limited capability to determine what materials and components are needed, how many are needed and when they are needed and when they should be ordered so that they are likely to be available when needed. In other words, MRP simply exploded the MPS into the required materials and was conceived as an inventory control tool or a requirements calculator. Later the logic of MRP technique was extended to serve as the key component in an information system for planning and controlling production operation and purchasing. It was OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 37 Operations Planning helpful to production and operations managers to determine the relative priorities of shop orders and purchase orders. As a manufacturing planning and controlsystem, MRP laid the basic foundation for production activity control or shop-loor control. 2.9 ENTERpRIsE REsouRcEs plANNINg Enterprise resource planning, popularly known as ERP, is today’s buzz-word in the corporate world. Companies world-wide use ERP to integrate business processes and thereby reduce costs and increase productivity. It has established its base as a global phenomena. Traditionally, companies developed isolated computer applications to suit and satisfy each of their functional segments such as sales, purchase, production, inventory, personnel and accounts. Materials Requirement Planning (MRP I) and Manufacturing Resource Planning re (MRP II) were developed basically to address the requirements of the manufacturing set-up. But the information available in various functional segments was so scattered that it was almost impossible to consolidate the information and provide the same to the people in the j top management to enable them to take vital business decisions. Hence, the companies, whether in the manufacturing or the service sector have been searching for the ‘total solution’ on an integrated system which could provide for the information needs of the entire enterprise. ERP software was developed to provide such a ‘total solution’ to the business enterprise. To be highly successful in today’s global competitive market, it is necessary that business enterprises continuously strive for developing a high level of interaction and co-ordination along the supply chain and improve in the area of quality, time to reach the market, customer satisfaction, performance and proitability. The ERP software fulils this need. What is ERp? ERP is a software package developed for optimum use of resources of an enterprise in a planned manner. ERP integrates the entire enterprise starting from the supplier to the customer, covering logistics, inancial and human resources. This will enable the enterprise to increase productivity by reducing costs. ERP is a package for cost saving. Once the ERP is Implemented, a single solution addresses the information needs of the whole organisation. 2.10 EcoNoMIc bATcH QuANTITy Production managers often have to decide what quantity of output must be produced in a batch (known as lot size or batch size). The products are manufactured in lot sizes against the anticipated demand for the products. Often the quantity produced may exceed the quantity which can be sold. (i.e., production rates exceed demand rates). The optimum lot size which is known as economic lot size or economic batch quantity or economic manufacturing quantity is that quantity of output produced in one batch, which is most economical to produce, i.e., which results in lowest average cost of production. Determination of Economic lot size for Manufacturing: The factors to be considered in arriving at the economic lot size are: (i) usage rate: The rate of production of parts should match with the rate of usage of these parts in the assembly line. (ii) Manufacturing cost: Higher the lot size, lower will be the cost per unit produced because of distribution of set up costs for setting up production or machines and preparing paper work (production orders). But the carrying cost (handling and storing costs) will increase with increase in lot size. (iii) cost of deterioration and obsolescence: Higher the lot size, higher will be the possibility of loss due to deterioration (items deteriorating after shelf life) or obsolescence (due to change in technology or change in product design). Before deciding on production using economic lot sizes, the availability of production capacity to produce the product in economic lot size must be veriied. The economic lot size balances the two opposing costs related to batch size i.e., setup cost for production and the inventory carrying costs resulting from inventory of products 38 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT produced when production rate exceeds usage rate or when the items produced are not immediately consumed in the next stage of production. The set up cost per unit decreases with increase in lot size whereas the inventory carrying cost increases with increase in lot size. Diagram below illustrates the concept of economic batch quantity or economic lot size. If S is the set up cost per set up, ‘C’ is the production cost per unit produced and I is the inventory carrying changes (%) and A is the annual demand for the item in units, then, Economic Batch Quantity (EBQ) or Economic Lot Size (ELS) or Economic Manufacturing Quantity (EMQ) = 2AC = CI ( )( ) 2 × Annual demand × Set up Cost per set up (in units) Production Cost × Inventory conveying per unit charges (percentage) ( )( ) Economic Run length: When a irm is producing an item and keeping it in inventory for later use, instead of buying it, the formula used to calculate economic order quantity (EOQ) can be used to calculate the economic production quantity referred to as Economic Run Length (ERL). If ‘p’ is the production rate and ‘d’ is the demand rate (or consumption rate), A is the annual demand for the item in units, I is the inventory carrying charges (percentage), C is the production cost per unit, then, Economic Run Length (ERL) = = 2AS d  CI 1−   p ( )( )( ) 2 × Annual demand × Set up Cost per set up (in units) Production Cost × Inventory conveying −  Demand Rate  per unit charges (percentage)  Production Rate  ( ) Illustration 12. The monthly requirement of raw material for a company is 3000 units. The carrying cost is estimated to be 20% of the purchase price per unit, in addition to ` 2 per unit. The purchase price of raw material is ` 20 per unit. The ordering cost is ` 25 per order. (i) You are required to ind EOQ.(ii) What is the total cost when the company gets a concession of 5% on the purchase price if it orders 3000 units or more but less than 6000 units per month. (iii) What happens when the company gets a concession of 10% on the purchase price when it orders 6,000 units or more? (iv) Which of the above three ways of orders the company should adopt? OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 39 Operations Planning solution: We are given that, D = 3,000 × 12 = 36,000 units per annum ; S = ` 25; C = 2 + 20% of ` 20 = 2 + 4 = ` 6 (i) EOQ = 2DS = C 2 × 36000 × 25 = 3,00,000 = 548 units (approx.) 6 Total cost = Ordering Cost + Cost of raw material + Storage cost = (36,000 / 548) × 25 + (36,000 × 20) + (548/2) × 6 = ` 1642.33 + 7,20,000+ 1,644 = ` 7,23,286. (ii) When the company has an option to order between 3000 and 6000 units, the EOQ should be calculated with a reduction in price by 5% (due to concession); The purchase price = 95% of ` 20 = ` 19. D = 36,000 units per annum; S = ` 25; C = 2 + 20% of 19 = 2 + 3.80 = ` 5.80 EOQ = 2 × 36000 × 25 18,00,000 = = 557 units app. 5.80 5.80 Total cost = (36,000/557) × 25 + (36,000 × 19) + (557/2) × 5.80 = ` (1,615.79 + 6,84,000 + 1,615.30) = ` 6,87,231.09 (iii) When the company orders more than 6,000 units purchase price = 90% of ` 20 (because 10% concession) = ` 18; D = 36,000 units per annum; S = ` 25; C = 2 + 20% of ` 18 = 2 + 3.60 = 5.60 EOQ = 2DS = C 2 × 36000 × 25 = 567 units app. Total cost 6 = (36,000/567) × 25+ (36,000×18) + (567/2) × 5.60 = ` 1,587.30 + 6,48,000 + 1,587.60 = ` 6,51,174.90 (iv) Comparing these costs, we notice that the cost is minimum for (iii) order. Therefore the company should adopt a policy of ordering 567 units per order. Illustration 13. M/s. Tubes Ltd. are the manufacturers of picture tubes of T.V. The following are the details of their operation during 2001: 40 Average monthly market demand 2,000 tubes Ordering cost ` 100 per order Inventory carrying cost 20% per annum Cost of tubes ` 500 per tube Normal usage 100 tubes per week Minimum usage 50 tubes per week Maximum usage 200 tubes per week Lead time to supply 6 – 8 weeks OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT compute from the above: (1) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%, is it worth accepting? (2) Maximum level of stock. (3) Minimum level of stock. (4) Re-order level of stock. solution: (1) Economic Order Quantity: Annual usage of tubes (Co) = Normal usage per week × 52 weeks = 100 tubes × 52 weeks = 5,200 tubes. Ordering cost per order (O) = ` 100. Inventory carrying cost per unit per annum EOQ = C0O = C0 = 20% of ` 500 = ` 100. 2 × 200 units × ` 100 = 102 units (approx.). ` 100 Evaluation of order size of 1,500 units at 5% discount No. of orders = 5,200 units = 3.46 units or 4 (in case of a fraction, the next whole number is considered). 1,500 units ` Ordering cost order per year at ` 100 per order 400 Carrying cost of average inventory: 1,500 units 20 × ` (500 less 5%) × 2 100 71,250 Total annual cost (excluding item cost) 71,650 Annual cost if EO Q (102 units) is adopted : Ordering cost: 5,200 ÷ 102 or 51 orders per year of `100 per order Carrying cost of average inventory 102 units 20 × ` 500 × 2 100 Total annual cost (excluding item cost) ` 5,100 5,100 10,200 Increase in annual cost: ` (71,650 – 10,200) = ` 61,450. Amount of quantity discount: 5% × ` 500 × 5,200, units = ` 1,30,000. Since the amount of quantity discount (` 1,30,000) is more than the increase in total annual cost (` 61,450), it is advisable to accept the offer. This will result in a saving of ` (1,30,000 - 61,450) or ` 68,550 p.a. in inventory cost. (2) Maximum Level of Stock: = Re-order level + Re-order quantity – (Minimum usage × Minimum delivery period) = 1,600 units + 102 units – (50 units × 6 weeks) = 1,402 units. (3) Minimum Level of Stock: = Re-order level – (Normal usage × Normal delivery period) [see Note] = 1,600 units – (100 units × 7 weeks) = 900 units. Note: Normal delivery period is taken to be the average delivery period. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 41 Operations Planning (4) Re-order Level of Stock: = Maximum usage × Maximum delivery period = 200 units × 8 weeks = 1,600 units. Illustration 14. M/s Kobo Bearings Ltd., is committed to supply 24,000 bearings per annum to M/s Deluxe Fans on a steady daily basis. It is estimated that it costs 10 paisa as inventory holding cost per bearing per month and that the setup cost per run of bearing manufacture is ` 324. (a) What is the optimum run size for bearing manufacture? (b) What should be the interval between the consecutive optimum runs? (c) Find out the minimum inventory holding cost. solution: (a) Optimum run size or Economic Batch Quantity (EBQ) 2 × Annual Output × Setup cost = Annual Cost of Carrying one unit = 2 × 24000 × 324 = 3600 units 0.10 × 12 (b) Interval between two consecutive optimum runs = = EBQ ×3 Monthly Output 3600 × 30 = 54 Calendar days 24000 ÷ 12 (c) Minimum inventory holding cost = Average inventory × Annual carry-ing cost of one unit of inventory = (3600 ÷ 2) × 0.10×12 = ` 2,160. Illustration 15. A company planning to manufacture a household cooking range has to decide on the location of the plant. Three locations are being considered viz., Patna, Ranchi, and Dhanbad. The ixed costs of the three location are estimated to be `30 lakh, `50 lakh, and `25 lakh per annum respectively. The variable costs are `300, `200 and `350 per unit respectively. The expected sales price of the cooking range is `700 per unit Find out: (i) The range of annual production/sales volume for which each location is the most suitable and (ii) Which one of the three locations is the best location at a production/sales volume of 18,000 units? Answer: The total cost of the three locations are: At Total cost = Fixed cost + Variable cost for a volume “X” Patna => Total cost = 30,00,000 + 300 × X Ranchi => Total cost = 50,00,000 + 200 × X Dhanbad => Total cost = 25,00,000 + 350 × X We can compute and plot the total costs per annum at the three different locations for the various cases of production volume of 5,000, 10,000, 15,000, 20,000 25,000 units. 42 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (i) patna Volume (Units) 5,000 10,000 15,000 20,000 25,000 Total = 30,00,000+ 30,00,000+ 30,00,000+ 30,00,000+ 30,00,000+ Cost (`) 300 (5,000) 300 (10,000) 300 (15,000) 300 (20,000) 300 (25,000) = `45 lakhs = `60 lakhs = `75 lakhs = `90 lakhs = `105 lakhs 5,000 10,000 15,000 20,000 25,000 Total = 50,00,000+ 50,00,000+ 50,00,000+ 50,00,000+ 50,00,000+ Cost (`) 200 (5,000) 200 (10,000) 200 (15,000) 200 (20,000) 200 (25,000) = `60 lakhs = `70 lakhs = `80 lakhs = `90 lakhs = `100 lakhs 5,000 10,000 15,000 20,000 25,000 Total = 25,00,000+ 25,00,000+ 25,00,000+ 25,00,000+ 25,00,000+ Cost (`) 350 (5,000) 350 (10,000) 350 (15,000) 350 (20,000) 350 (25,000) = `42.5 lakhs = `60 lakhs = `77.5 lakhs = `95 lakhs = `112.5 lakhs (ii) Ranchi Volume (Units) (iii) Dhanbad Volume (Units) If the volume distribution be as follows: Up to 10,000 units Favourable Location Dhanbad Between 10,000 units to Above 20,000 units 20,000 units Patna Ranchi For a volume 18000 units favourable location is Patna which can be substantiated by the followings: Patna => 30,00,000 + 300 × 18,000 = `84 lakhs Ranchi => 50,00,000 + 200 × 18,000 = `86 lakhs Dhanbad => 25,00,000 + 350 × 18,000 = `88 lakhs. Illustration 16. Monthly demand for a component is 1000 units. Setting-up cost per batch is ` 120. Cost of manufacture per unit is ` 20. Rate of interest may be considered at 10% p.a. Calculate the EBQ. Answer: Calculation of EBQ: EBQ = = 2 × Annual Demand × Set-upcost Unit Cost × Inventory carrying cost per unit per year (`) (2 × 12 × 1000 × 120) = 1200 units. (0.1× 20) OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 43 Operations Planning Illustration 17. The following data on the exports of an item by a company during the various years it a straight line, (for the time being, assume that a straight line gives a good it). Give a forecast for the years 2013 and 2014. Year No. of items (‘000) 2004 13 2005 20 2006 20 2007 28 2008 30 2009 32 2010 33 2011 38 2012 43 Answer: We can call the years as ‘X’ and exports as ‘Y. In order to use the normal equations for the least square line, we need ΣX, ΣY, ΣXY and ΣX2. If we arrange X in such a way that ΣX = 0, it will simplify our calculations. Therefore, we call the year 2008 as 0, 2007 as -1 and 2009 as + 1 and likewise for the other years in the data. The rearrangement is shown in the table as follows: X y X2 Xy -4 13 16 -52 -3 20 9 -60 -2 20 4 -40 -1 28 1 -28 0 30 0 0 1 32 1 32 2 33 4 66 3 38 9 114 4 43 16 172 ΣX = 0 ΣY = 257 Σx = 60 ΣXY - 204 2 ΣY = aoN + a1ΣX ΣXY = aoΣX + a1ΣX2 As ΣX = 0 and ΣY = aoN and ΣXY = a1ΣX2 Therefore, ao = ΣY / N = 257 / 9 = 28.56 a1 = ΣXY / ΣX2 = 204 / 60 = 3.4 The equation of a straight line itting the data is: Y = 28.56 + 3.4 X (a) Forecast for 2013, (i.e., X = 5): Y = 28.56 + 3.4 (5) = 45.56 (b) Forecast for 2014, (i.e., X = 6): Y = 28.56 + 3.4 (6) = 48.96 44 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT study Note - 3 DEsIgNINg oF opERATIoNAl sysTEM AND coNTRol This study Note includes 3.1 production Design 3.2 process Design & selection 3.3 process planning 3.4 product life cycle 3.5 process selection 3.1 pRoDucTIoN DEsIgN Importance of product Design Production or operations strategy is directly inluenced by product design for the following reasons: (i) As products are designed, all the detailed characteristics of each product are established. (ii) Each product characteristic directly affects how the product can be made or produced (i.e., process technology and process design) and (iii) How the product is made determines the design of the production system (production design) which is the heart of production and operations strategy. Further, product design directly affects product quality, production costs and customer satisfaction. Hence, the design of product is crucial to success in today’s global competition. A good product design can improve the marketability of a product by making it easier to operate or use, upgrading its quality, improving its appearance, and/or reducing manufacturing costs. A distinctive design may be the only feature that signiicantly differentiates a product. An excellent design includes usability, aesthetics, reliability, functionality, innovation and appropriateness. An excellent design provides competitive advantage to the manufacturer, by ensuring appropriate quality, reasonable cost and the expected product features. Firms of tomorrow will deinitely compete not on price and quality, but on product design. What Does product Design Do? The activities and responsibilities of product design include the following: (i) Translating customer needs and wants into product and service requirements (marketing). (ii) Reining existing products (marketing). (iii) Developing new products (marketing, product design and production). (iv) Formulating quality goals (quality assurance, production). (v) Formulating cost targets (accounting). (vi) Constructing and testing prototype (marketing, production). (vii) Documenting speciications (product design). Reasons for product Design or Redesign The most obvious reason for product design is to offer new products to remain competitive in the market. The second most important reason is to make the business grow and increase proits. Also, when productivity gains result in reduction of workforce, developing new products can mean adding jobs and retaining surplus workforce instead of downsizing by layoffs/ retrenchment. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 45 Designing of Operational Systems and Control Sometimes product design is actually redesign or modiication of existing design instead of an entirely new design. The reasons for this include customer complaints, accidents or injuries during product use, excessive warranty claims or low demand. Sometimes product redesign is initiated to achieve cost reductions in labour and material costs. objectives of product Design (i) The overall objective is proit generation in the long run. (ii) To achieve the desired product quality. (iii) To reduce the development time and cost to the minimum. (iv) To reduce the cost of the product. (v) To ensure producibility or manufacturability (design for manufacturing and assembly). Factors Inluencing Product Design (i) customer requirements: The designers must ind out the exact requirements of the customers to ensure that the products suit the convenience of customers for use. The products must be designed to be used in all kinds of conditions. (ii) convenience of the operator or user: The industrial products such as machines and tools should be so designed that they are convenient and comfortable to operate or use. (iii) Trade off between function and form: The design should combine both performance and aesthetics or appearance with a proper balance between the two. (iv) Types of materials used: Discovery of new and better materials can improve the product design. Designers keep in touch with the latest developments taking place in the ield of materials and components and make use of improved materials and components in their product designs. (v) Work methods and equipments: Designers must keep abreast of improvements in work methods, processes and equipments and design the products to make use of the latest technology and manufacturing processes to achieve reduction in costs. (vi) cost/price ratio: In a competitive market, there is lot of pressure on designers to design products which are cost effective because cost and quality are inbuilt in the design. With a constraint on the upper limit on cost of producing products, the designer must ensure cost effective designs. (vii) product quality: The product quality partly depends on quality of design and partly on quality of conformance. The quality policy of the irm provides the necessary guidelines for the designers regarding the extent to which quality should be built in the design stage itself by deciding the appropriate design speciications and tolerances. (viii) process capability: The product design should take into consideration the quality of conformance, i.e., the degree to which quality of design is achieved in manufacturing. This depends on the process capability of the machines and equipments. However, the designer should have the knowledge of the capability of the manufacturing facilities and specify tolerances which can be achieved by the available machines and equipments. (ix) Effect on existing products: New product designs while replacing existing product designs, must take into consideration the use of standard parts and components, existing manufacturing and distribution strategies and blending of new manufacturing technology with the existing one so that the costs of implementing the changes are kept to, the minimum. (x) packaging: Packaging is an essential part of a product and packaging design and product design go hand in hand with equal importance. Packaging design must take into account the objectives of packaging such as protection and promotion of the product. Attractive packaging enhances the sales appeal of products in case of consumer products (nondurable). 46 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT characteristics of good product Design A good product design must ensure the following: (i) Function or performance: The function or performance is what the customer expects the product to do to solve his/her problem or offer certain beneits leading to satisfaction. For example, a customer for a motor bike expects the bike to start with a few kicks on the kick peddle and also expects some other functional aspects such as pick-up, maximum speed, engine power and fuel consumption etc. (ii) Appearance or aesthetics: This includes the style, colour, look, feel, etc. which appeals to the human sense and adds value to the product. (iii) Reliability: This refers to the length of time a product can be used before it fails. In other words, reliability is the probability that a product will function for a speciic time period without failure. (iv) Maintainability: Refers to the restoration of a product once it has failed. High degree of maintainability is desired so that the product can be restored (repaired) to be used within a short time after it breaks down. This is also known as serviceability. (v) Availability: This refers to the continuity of service to the customer. A product is available for use when it is in an operational state. Availability is a combination of reliability and maintainability. High reliability and maintainability ensures high availability. (vi) productibility: This refers to the ease of manufacture with minimum cost (economic production). This is ensured in product design by proper speciication of tolerances, use of materials that can be easily processed and also use of economical processes and equipments to produce the product quickly and at a cheaper cost. (vii) Simpliication: This refers to the elimination of the complex features so that the intended function is performed with reduced costs, higher quality or more customer satisfaction. A simpliied design has fewer parts which can be manufactured and assembled with less time and cost. “ (viii) standardisation: Refers to the design activity that reduces variety among a group of products or parts. For example, group technology items have standardised design which calls for similar manufacturing process steps to be followed. Standard designs lead to variety reduction and results in economies of scale due to high volume of production of standard products. However, standardised designs may lead to reduced choices for customers. (ix) Speciication: A speciication is a detailed description of a material, part or product, including physical measures such as dimensions, volume, weight, surface inish etc. These speciications indicate tolerances on physical measures which provide production department with precise information about the characteristics of products to be produced and the processes and production equipments to be used to achieve the speciied tolerances (acceptable variations). Interchangeability of parts in products produced in large volumes (mass production and low-line production) is provided by appropriate speciication of tolerances to facilitate the desired it between parts which are assembled together. (x) safety: The product must be safe to the user and should not cause any accident while using or should not cause any health hazard to the user. Safety in storage, handling and usage must be ensured by the designer and a proper package has to be provided to avoid damage during transportation and storage of the product. For example, a pharmaceutical product while used by the patient, should not cause some other side effect threatening the user. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 47 Designing of Operational Systems and Control 3.2 pRocEss DEsIgN & sElEcTIoN process Design is concerned with the overall sequences of operations required to achieve the product speciications. It speciies the type of work stations to be used, the machines and equipments necessary to carry out the operations. The sequence of operations are determined by (a) the nature of the product, (b) the materials used, (c) the quantities to be produced and (d) the existing physical layout of the plant. The process design is concerned with the following: (i) Characteristics of the product or service offered to the customers. (ii) Expected volume of output. (iii) Kinds of equipments and machines available in the irm. (iv) Whether equipments and machines should be of special purpose or general purpose. (v) Cost of equipments and machines needed. (vi) Kind of labour skills available, amount of labour available and their wage rates. (vii) Expenditure to be incurred for manufacturing processes. (viii) Whether the process should be capital-intensive or labour-intensive. (ix) Make or buy decision. (x) Method of handling materials economically. 3.3 pRocEss plANNINg process planning Process planning refers to the way production of goods or services is organised. It is the basis for decisions regarding capacity planning, facilities (or plant) layout, equipments and design of work systems. Process selection is necessary when a irm takes up production of new products or services to be offered to the customers. Three primary questions to be addressed before deciding on process selection are: (i) How much variety of products or services will the system need to handle? (ii) What degree of equipment lexibility will be needed? (iii) What is the expected volume of output? process strategy A process strategy is an organisation’s approach to process selection for the purpose of transforming resource inputs into goods and services (outputs). The objective of a process strategy is to ind a way to produce goods and services that meet customer requirement and product speciication (i.e., design speciications) within the constraints of cost and other managerial limitations. The process selected will have a long-term effect on eficiency and production as well as lexibility, cost, and quality of the goods produced. Hence it is necessary that a irm has a sound process strategy at the time of selecting the process. Key aspects in process strategy include: (i) Make or buy decisions (ii) Capital intensity and (iii) Process lexibility Make or buy decisions refer to the extent to which a irm will produce goods or provide services in-house or go for outsourcing (buying or subcontracting). capital intensity refers to the mix of equipment and labour which will be used by the irm. 48 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT process Flexibility refers to the degree to which the system can be adjusted to changes in processing requirements due to such factors as changes in product or service design, changes in volume of products produced and changes in technology. Three process strategies: Virtually every good or service is made by using some variation of one of three process strategies. They are: (i) process focus (ii) repetitive focus and (iii) product focus. Exhibit 1 illustrates the relationship between the three process strategies and volume and variety of products produced. Each of these three strategies are discussed below: (i) process Focus: Majority (about 75 per cent) of global production is devoted to low volume, high variety products in manufacturing facilities called job shops. Such facilities are organised around performing processes. For example, the processes might be welding, grinding or painting carried out in departments devoted to these processes. Such facilities are process focussed in terms of equipment, machines, layout and supervision. They provide a high degree of product lexibility as products move intermittently between processes. Each process is designed to perform a wide variety of activities and handle frequent changes. Such processes are called intermittent processes. These facilities have high variable costs and low utilisation of facilities. (ii) Repetitive Focus: A repetitive process is a product oriented production process that uses modules. It falls between product focus and process focus. It uses modules which are parts or components prepared often in a continuous or mass production process. A good example of repetitive process is the assembly line which is used for assembling automobiles and household appliances and is less lexible than process-focused facility. Personal computer is an example of a repetitive process using modules in which the modules are assembled to get a custom product with the desired coniguration. (iii) product Focus: It is a facility organised around products, a product oriented, high-volume low-variety process. It is also referred to as continuous process because it has very long continuous production run. Examples of product focussed processes are steel, glass, paper, electric bulbs, chemicals and pharmaceutical products, bolts and nuts etc. Product-focussed facilities need standardisation and effective quality control. The specialised nature of the facility requires high ixed cost, but low variable costs reward high facility utilisation. Table: Gives a comparison of three choices namely process focus, repetitive focus and product focus. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 49 Designing of Operational Systems and Control 3.4 pRoDucT lIFE cyclE Products, like men, are mortal. They lourish for a time, then decline and die. The life cycle of a product has many points of similarity with the human life cycle. A product is born, grows lustily, attains a dynamic maturity, then enters its declining years. Like a human being a product that has not built up its potential during its formative years is likely to be relatively unsuccessful on its maturity. But, there are critical differences between the product and the human life cycle. For instance, every person has an average life expectancy. But the life expected of a product varies widely. The concept of product failure is applicable both to new products and the existing ones. There may, however, be varying periods of life spans for each product: some failing immediately, other living for a longer period. The product, thus, has “life cycles” just as human beings have. From its birth, a product passes through various stages, until it is inally abandoned, i. e.. discontinued from the market. These stages taken together are referred, to as “the product life cycle”. This life cycle of the product comprises four stages: Introduction, Growth, Maturity and Decline. It should be noted that it is purely a theoretical concept. This may graphically be represented Fig. in below: The introduction stage is preceded by ‘production planning and development’.This period requires greater investment. This investment should be gradually recouped as the sales pick up. The concept of life cycle would give the management an idea as to the time within which the original investment could be recouped. Fig. : product life cycle. After testing, a product enters the introduction stage and the product will then become available in the national market. Sales would begin gradually as potential buyers learn of the product through advertising and other seIIing techniques. But the proits will be low as part of the investment is to be recouped besides heavy expenditure on selling. In the growth stage, both sales and proits will begin to increase. It is here that similar other new products begin to appear in the market as substitutes and offer competition. The management, therefore, should try to change its approach by changing its strategy from “buy my product” to “try my product”. At the end of this stage, the distribution arrangement is likely to get completed and the prices, if necessary, are reduced a little. The third stage is the maturity stage. During this stage the manufacturers introduce new models or adopt methods such as trading-in, etc., to promote the sale of their brands with a view to retaining their position in the market. The number of buyers will continue to grow, but more slowly. In economic terms this is the stage where supply exceeds demand. Some of the promotional efforts may lengthen the span of this stage but they will not offer a permanent solution. At the inal stage of decline, proit margins touch a low level, competition becomes severe and customers start using newer and better products. It is here that the story of a product ends-a natrural but hard end. The above discussion concentrates only on the life cycle of a product, beginning with its introduction into the market (i.e., post-marketing). But a series of processes are to be undertaken by the management prior to the introduction of a product. The diagram given above is presented in an enlarged form to incorporate the preintroduction (or pre-marketing) stages also. 50 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Product Iife cycle concept may be used as a managerial tool. Marketing strategies must change as the product goes through the life cycle. If managers understand the cycle concept they are in a better position to forecast the future sales activities and plan marketing strategies. The following points, however, may be kept in mind in using this concept. 3.5 pRocEss sElEcTIoN process choice determines whether resources are organised around products or processes in order to implement the low strategy. It depends on the volumes and degree of customisation to be provided. These major process decisions are discussed in detail in the following paragraphs: 1. process choice: The production manager has to choose from ive basic process types — (i) job shop, (ii) batch, (iii) repetitive or assembly line, (iv) continuous and (v) project. (i) Job shop process: It is used in job shops when a low volume of high-variety goods are needed. Processing is intermittent, each job requires somewhat different processing requirements. A job shop is characterised by high customisation (made to order), high lexibility of equipment and skilled labour and low volume. A tool and die shop is an example of job shop, where job process is carried out to produce one-of-a kind of tools. Firms having job shops often carry out job works for other irms. A job shop uses a lexible low strategy, with resources organised around the process. (ii) batch process: Batch processing is used when a moderate volume of goods or services is required and also a moderate variety in products or services. A batch process differs from the job process with respect to volume and variety. In batch processing,volumes are higher because same or similar products or services are repeatedly provided, examples of products produced in batches include paint, ice cream, soft drinks, books and magazines. (iii) Repetitive process: This is used when higher volumes of more standardised goods or services are needed. This type of process is characterised by slight lexibility of equipment (as products are standardised) and generally low labour skills. Products produced include automobiles, home appliances, television sets, computers, toys etc. Repetitive process is also referred to as line process as it include production lines and assembly lines in mass production. Resources are organised around a product or service and materials move in a line low from one operation to the next according to a ixed sequence with little work-in-progress inventory. This kind of process is suitable to “manufacture-to-stock” strategy with standard products held in inished goods inventory. However, “assemble-to-order” strategy and “mass customisation” are also possible in repetitive process. (iv) continuous process: This is used when a very highly standardised product is desired in high volumes. These systems have almost no variety in output and hence there is no need for equipment lexibility. A continuous process is the extreme end of high volume, standardised production with rigid line lows. The process often is capital intensive and operate round the clock to maximise equipment utilisation and to avoid expensive shut downs and shut ups. Examples of products made in continuous process systems include petroleum products, steel, sugar, lour, paper, cement, fertilisers etc. (v) project process: It is characterised by high degree of job customisation, the large scope for each project and need for substantial resources to complete the project. Examples of projects are building a shopping centre, a dam, a bridge, construction of a factory, hospital, developing a new product, publishing a new book etc. Projects tend to be complex, take a long time and consist of a large number of complex activities. Equipment lexibility and labour skills can range from low to high depending on the type of projects. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 51 Designing of Operational Systems and Control 52 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT study Note - 4 pRoDucTIoN plANNINg AND coNTRol This study Note includes 4.1 production planning and control Introduction 4.2 Time study, Work study, Method study & Job Evaluation 4.3 Job Allocation – Assignment Technique 4.4 scheduling 4.5 Queuing Models 4.6 simulation 4.7 line balancing 4.8 lean operations 4.9 Just-In-Time (JIT) 4.10 Transportation Model 4.11 linear programming Technique 4.1 pRoDucTIoN plANNINg AND coNTRol INTRoDucTIoN Introduction Production planning control can be viewed as the nervous system of a production operation. The primary concern of production planning and control is the delivery of products to customers or to inventory stocks according to some predetermined schedule. All the activities in the manufacturing or production cycle must be planned, coordinated, organised, and controlled to achieve this objective. From a long-term point of view (usually from seven to ten years or more) production planning largely deals with plant construction and location and with product-line, design and development. Short-range planning (from several months to a year) focuses on such areas as inventory goals and wage budgets. In plans projected over a two-to-ive year period, capital-equipment budgeting and plant capacity and layout are the major concern. Production planning and control normally relects the short range activities and focuses on the issues and problems that arise in the planned utilisation of the labour force, materials, and physical facilities that are required for manufacturing the products in accordance with the primary objectives of the irm. Production systems are usually designed to produce a variety of products and are, therefore, complex. In such complex systems, anything can happen and usually it is so. Therefore, it is vital to exercise some kind of control over the production activities. Control is possible only when everything is planned. Production planning and control is thus a very important aspect of production management. objectives of production planning and control The ultimate objective of production planning and control is to contribute to the proits of the enterprise. This is accomplished by keeping the customers satisied through the meeting of delivery schedules. Further, the speciic objectives of production planning and control are to establish the routes and schedules for work that will ensure the optimum utilisation of raw materials, labourers, and machines to provide the means for ensuring the operation of the plant in accordance with these plans. Production planning and control is essentially concerned with the control of work-in-process. To control work-in-process effectively it becomes necessary to control not only the low of material but also the utilisation of people and machines. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 53 Production Planning and Control Production planning and control fulils these objectives by focusing on the following points: (i) Analysing the orders to determine the raw materials and parts that will be required for their completion, (ii) Answering questions from customers and salesmen concerning the status of their orders, (iii) Assisting the costing department in making cost estimates of orders, (iv) Assisting the human resource departments in the manpower planning and assignment of men to particular jobs, (v) Controlling the stock of inished parts and products, (vi) Determining the necessary tools required for manufacturing, (vii) Direction and control of the movement of materials through production process, (viii) Initiating changes in orders as requested by customers while orders are in process, (ix) Issuing requisitions for the purchase of necessary materials, (x) Issuing requisitions for the purchase or manufacture of necessary tools and parts, (xi) Keeping the up-to-date records scheduled and in process, (xii) Maintaining stocks of materials and parts, (xiii) Notifying sales and accounting of the acceptance of orders in terms of production feasibility, (xiv) Preparing the route sheets and schedules showing the sequence of operation required to produce particular products, (xv) Production of work orders to initiate production activities, (xvi) Receiving and evaluating reports of progress on particular orders and initiating corrective action, if necessary, (xvii) Receiving orders from customers, (xviii) Revising plans when production activities cannot conform to original plans and when revisions in scheduled production are necessary because of rush orders. production control involves the following functions: (i) Planning the production operations in detail, (ii) Routing, i.e., laying down the path for the work to follow and the order in which the various operations will be carried out, (iii) Scheduling, i.e., establishing the quantity of work to be done, and ixing the time table for performing the operations, (iv) Dispatching, i.e., issuing the necessary orders, and taking necessary steps to ensure that the time targets set in the schedules are effectively achieved, (v) Follow-up, taking necessary steps to check up whether work proceeds according to predetermined plans and how far there are variances from the standards set earlier, (vi) Inspection, i.e., conducting occasional check-ups of the products manufactured or assembled to ensure high quality of the production. To examine whether work in going on as per the plan Follow up Routing Selection of path or route over which every place is to travel (to transform from raw material to inished product) Match the two Optimalities Act of assigning speciic tasks to a speciic work centre, to be performed in a speciic sequenc Dispaching Scheduling Arrangement of different machines involved in manufacturing Figure : Techniques of Production Control 54 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT basic types of production control: Production control can be of six types: (i) block control This type of control is most prominent in textiles and book and magazine printing. In these industries it is necessary to keep things separated and this is the fundamental reason why industries resort to block control. (ii) Flow control This type of control is commonly applied in industries like chemicals, petroleum, glass, and some areas of food manufacturing and processing. Once the production system is thoroughly designed, the production planning and control department controls the rate of low of work into the system and checks it as it comes out of the system. But, under this method, routing and scheduling are done when the plant is laid out. That is to say, the production line which is established is well balanced and sequenced before production operations begin; this type of control is more prevalent in continuous production systems. (iii) load control Load control is typically found wherever a particular bottleneck machine exists in the process of manufacturing. (iv) order control The most, common type of production control is called order control. This type of control is commonly employed in companies with intermittent production systems, the so-called job-lot shops. Under this method, orders come into the shop for different quantities for different products. Therefore, production planning and control must be based, on the individual orders. (v) special project control Special production control is necessary in certain projects like the construction of bridges, ofice buildings, schools, colleges, universities, hospitals and any other construction industries. Under this type of control, instead of having sets of elaborate forms for tooling and scheduling, a man or a group of men keeps in close contact with the work. (vi) batch control Batch control is another important, type of production control which is frequently found in the food processing industries. Thus, production control in batch-system of control operates with a set of production planning and control in continuous-production systems. Production systems may be continuous or intermittent. The continuous production systems are characterised by: (i) Fixed-path material handling equipment, (ii) High volume of production, (iii) Product layouts, (iv) Production of standardised products, (v) Production to stock or long-range orders, (vi) The use of special-purpose machines or automation. production planning and control in continuous-production systems involve two activities: (i) Assuring that supply of raw materials and supplies are on hand to keep the production system supplied and assuring that inished products are moved from the production-system, (ii) Maintaining a constant rate of low of the production, so that the system can operate near capacity in some case or can meet the quantity requirements of the production. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 55 Production Planning and Control production planning in intermittent production systems: The intermittent production systems are characterized by the following: (i) General purpose production machines are normally utilised and process layout is favoured. (ii) Materials handling equipment is typically of the varied path type such as hand trucks and forklift trucks. (iii) Relatively high cost, skilled labour is needed to turn out the various quantities and types of products. (iv) The company generally manufactures a wide variety of products; for the majority of items, sales volumes and consequently production order sizes are small in relation to the total production. 4.2 TIME sTuDy, WoRk sTuDy, METHoD sTuDy, Job EVAluATIoN Time study: Time study is deined to be a searching scientiic analysis of the methods and equipment used or planned in doing a piece of work, development in practical detail of the best manner of doing it and determination of the time required. Operation analysis is the study of the entire process to determine whether operations can be eliminated, combined or the sequence changed. Operation analysis aims to determine the one best way and can be applied to method, materials, tools equipment layout, working conditions and human requirements of each operation. Job standardisation consists in determining the one best way of performing a job under the means at command of recording the exact method along with the time for each element of operation and establishing means to maintain the standard conditions. Another term connected with time and motion study is the job analysis. Job analysis is the determination of essential factors in a speciic kind of work and of the qualiications of a worker necessary for its performance. Time study aims at determining the best manner of doing a job and timing the performance of the job when done in the best manner. In motion study the work is divided into fundamental motions and in time study work is divided into elements of operations. In both cases attempts are made to remove useless motions and improve combination and sequences of motions and operations. In motion study the best way of doing a work is determined by motion analysis and operators are trained to follow the method so determined but in time study the best method is determined by analysis of the methods and equipment, used and motions only roughly considered and that too indirectly. In time study, setting of production standards, standards for cost purposes and wage incentives are emphasised. The measurement of human effort is a dificult job which can only be solved by using scientiic method and industrial experience combined with knowledge of psychology. The use of scientiic method involves experiment measurement and elimination of variables connected with a job. The variables connected with a job are the method of manufacture, tools and equipments, material, working conditions, worker concerned and time required to perform the job. In order to measure the last variable time, the other variables must be eliminated by standardising. In going to proceed for time study, it is irst necessary to standardise the method and conditions of work and to deine what an average worker is. Time study has two sides, mechanical and human. Before commencing the time study, the time study man should ensure and ascertain the following: (i) That motion studies have been carried out so that planning of work, work places and appliances are satisfactory. (ii) That the operations can be performed in the correct; sequence without interruption. (iii) That the human effort involved is minimum. 56 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Work study: It is a general term for the techniques: methods study and work measurement which are used in the examination; of human work in all its contexts and systematically investigate all factors leading to improvement of eficiency. Work study aims at inding the best and most eficient way of using the available resources—men, materials, money and machinery. Once the method study has developed an improved procedure for doing a work the work measurement or time study will study the time to complete a job. Method study: It is the systematic investigation of the existing method of doing a job in order to develop and install an easy, rapid, eficient, effective and less fatiguing procedure for doing the same job and at minimum cost. This is achieved by eliminating unnecessary motions involved in a certain operation or by changing the sequence of operation or the process itself. Methods study can be made by the help of both motion study and time study. The methods study programme must include the following features:– (a) Uniform application, (b) Established standard practice, (c) Continuous review, (d) Credit distribution. A new and improved method developed in one department should be spread out to the entire plant preferably with further improvements. A new method must not be forgotten between orders as it happens sometimes in batch production. Methods department should always aim at improved and better ways of doing jobs. For successful control of methods study, the enthusiastic cooperation of every employee is required. To gain employee cooperation, distribution of credit is essential. It has been correctly said that a good methods department rarely takes credit for an original idea. Its success lies in getting new ways and methods adopted promptly, universally, continuously and cooperatively towards the improvement of productivity. Job Evaluation: Job evaluation is the ranking grading, and weighing of essential work characteristics of all jobs in order to ind out or rate the worth of jobs. It is a systematic approach to ascertain the labour worth of each job and is a very important concern of all employers. Job evaluation aims at fairness and consistency so far as all wages and salaries are concerned within an organisation and when systematic and impartial, it stimulates, conidence of the employees. There are three steps for evaluations of all jobs :– (i) Preparation of preliminary description of each existing job. (ii) Analysing each job to arrive at inal job descriptions and speciications. (iii) Analysing each job according to its approved description in order to determine its worth or value. Job Description and Speciications: The understanding of the job content or job description is the primary requirement. Job speciications are derived from the job descriptions which have already been approved. The speciication help determining the qualiication required of the individual desired for the position. This in turn guides the personnel department in the selection of employees and also guides shop executives in the placement of workmen. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 57 Production Planning and Control systems of Valuation: There are several systems of job evaluation. The fundamental criteria in valuation of a job into account are to make a speciic list of factors which affect job values. The many factors are: (i) Qualiications required of the worker, (ii) Job dificulties, (iii) Job responsibilities, (iv) Working conditions. All these factors are to be analysed in detail in order to complete the job description. The list of factors, the manner in which they are apprised and the method of inding out relative worth and money values distinguishes the various systems of valuation. The systems of valuations which are commonly adopted are given below: 1. The ranking or grading method, 2. The factor comparison method, 3. Point rating method. Ranking or grading Method: Under this system the titles of all jobs are written on cards and the grading is done by several competent judges. The hourly rates to be paid for different jobs are suggested by the judges without any consideration to the existing wage. The ranks or grades assigned to each job by all the judges are averaged and this average is considered the “score” for that job. Hourly rates are then ixed for jobs according to their ranking. Factor comparison Method: The factor comparison method analyses the job into much greater detail than the grading method. It ranks each job with respect to each factor that characterise the job and the factors are taken one at a time. All jobs are compared and ranked irst with respect to mental requirements, then skill, then physical requirements and after that responsibility and lastly working conditions. The total worth of the job is obtained by adding together money values which are assigned separately to the various levels of rank in each factor. Factor comparison method is more accurate than the simple ranking systems, since the separate factors are analysed comparatively. This method is lexible. point Rating Method: There are three methods of analytical evaluation of a job. They are: 1. Straight point method. 2. Weighted point method. 3. Valuation of jobs directly in money method, not specifying any maximum weight. (i) straight point Method: This method assigns equal weights for each characteristic. When evaluating a job under this system, it is assumed that all the characteristics have ranges of values between same maximum and minimum points. (ii) Weighted point Method: In this method different points are assigned to the different characteristics of doing jobs. (iii) Direct to Money Methods: After selecting the job characteristics, ten key jobs whose rates are believed to be correct, are taken and the present wage rates of these jobs are distributed to the job characteristics by each analyst. The jobs are then ranked by the analysts for each characteristic in order of the degree to which that characteristic is present. This serves as a check to show up any errors made in the original distribution of the wages rate to the various characteristics. 58 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 4.3 Job AllocATIoN – AssIgNMENT TEcHNIQuE AssIgNMENT Assignment is a special linear programming problem. There are many situations where the assignment of people or machines etc. may be called for. Assignment of workers to machines, clerks to various check-out counters, salesmen to different sales areas are typical examples of these. The Assignment is a problem because people possess varying abilities for performing different jobs and therefore the costs of performing jobs by different people are different. Thus, in an assignment problem, the question is how the assignments should be made in order that the total cost involved is minimized. There are four methods of solving an assignment problem and they are: 1. Complete Enumeration Method 2. Simplex Method 3. Transportation Method and 4. Hungarian Method Hungarian Method: The following are the steps involved in the minimization of an assignment problem under this method: step 1: Row operation Locate the smallest cost element in each row of the cost table. Now subtract this smallest element from each element in that row. As a result, there shall be at least one zero in each row of this new table, called the reduced cost table. step 2: column operation In the reduced cost table obtained, consider each column and locate the smallest element in it. Subtract the smallest value from every other entry in the column. As a consequence of this action, there would be at least one zero in each of the rows and columns of the second reduced cost table. step 3: optimality Draw the minimum no. of horizontal and vertical lines (not the diagonal ones) that are required to cover all the zero elements. If the no. of lines drawn is equal to ‘n’ (the no. of rows/columns) the solution is optimal and proceeds to step 6. If the no. of lines drawn is smaller than ‘n’ go to step 4. step 4: Improved Matrix Select the smallest uncovered (by the lines) cost element. Subtract this element from all uncovered elements including itself and add this element to each value located at the intersection of any two lines. The cost elements through which only one line passes remain unaltered. step 5: Repeat step 3 and 4 until an optimal solution is obtained. step 6: Given the optimal solution, make the job assignments as indicated by the ‘zero’ elements. This is done as follows: (a) Locate a row which contains only one zero element. Assign the job corresponding to this element to its corresponding person. Cross out the zero’s if any in the column corresponding to the element, which is indicative of the fact that the particular job and person are no more available. (b) Repeat (a) for each of such rows which contain only one zero. Similarly, perform the same operation in respect of each column containing only one ‘zero’ element, crossing out the zero(s), if any, in the row in which the elements lies. (c) If there is no row or column with only a single ‘zero’ element left, then select a row/column arbitrarily and choose one of the jobs (or persons) and make the assignment. Thus in such a case, alternative solutions exists. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 59 Production Planning and Control Illustration 1. Six men are available for different jobs. From past records the time in hours taken by different persons for different jobs are given below. Jobs Men 1 2 3 4 5 1 2 9 2 7 9 6 1 2 6 8 7 6 14 1 3 4 6 5 3 8 1 4 4 2 7 3 10 1 5 5 3 9 5 12 1 6 9 8 12 13 9 1 Find out an allocation of men to different jobs which will lead to minimum operation time. solution: Job Man 1 2 3 4 5 6 1 2 3 4 5 6 2 6 4 4 5 9 9 8 6 2 3 8 2 7 5 7 9 12 7 6 3 3 5 13 9 14 8 10 12 9 1 1 1 1 1 1 Row operation Job Man 1 2 3 4 5 6 column operation Improved 1 2 3 4 5 6 1 5 3 3 4 8 8 7 5 1 2 7 1 6 4 6 8 11 6 5 2 2 4 12 8 13 7 9 11 8 0 0 0 0 0 0 Job Man 1 2 3 4 5 6 Improved Matrix Assignment Job Man 1 2 3 4 5 6 60 1 2 3 4 5 6 0 4 2 2 3 7 7 6 4 0 1 6 0 5 3 5 7 10 4 3 0 0 2 10 1 6 0 2 4 1 0 0 0 0 0 0 optimal Assignment, then is 1 2 3 4 5 6 0 4 2 2 3 7 7 6 4 0 1 6 0 5 3 5 7 10 4 3 0 0 2 10 1 6 0 2 4 8 0 0 0 0 0 0 Job Man 1 2 3 4 5 6 1 2 3 4 5 6 0 3 2 2 2 6 7 5 4 0 0 5 0 4 3 5 6 9 4 2 0 0 1 9 1 5 0 2 3 7 1 0 1 1 0 0 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT optimal Assignment, then is Job 1 2 3 4 5 6 1 0 9 0 6 3 1 2 1 5 2 2 5 0 3 0 4 1 0 0 1 4 0 0 3 0 2 1 5 0 0 4 1 3 0 6 4 5 7 9 0 0 Man 1 3 - 2 2 6 - 1 3 1 - 4 4 4 - 3 5 2 - 3 6 5 - 9 22 Minimum Hours Illustration 2. A captain of a cricket team has to allot ive middle batting positions to ive batsmen. The average runs scored by each batsman at these positions are as follows: Batting Position Batsmen III IV V VI VII A 40 40 35 25 50 B 42 30 16 25 27 C 50 48 40 60 50 D 20 19 20 18 25 E 58 60 59 55 53 Make the assignment so that the expected total average runs scored by these batsmen are maximum. solution: loss Matrix III IV V VI VII A 40 40 35 25 50 20 20 25 35 10 B 42 30 16 25 27 18 30 44 35 33 C 50 48 40 60 50 10 12 20 0 10 D 20 19 20 18 25 40 41 40 42 35 E 58 60 59 55 53 2 0 1 5 7 Row operation column operation M3 10 10 14 25 0 0 12 25 17 15 10 12 19 0 10 5 6 4 7 0 2 0 0 5 7 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 10 10 15 25 0 0 12 26 17 15 10 12 20 0 10 5 6 5 7 0 2 0 1 5 7 61 Production Planning and Control Improved Matrix Maximum Average Runs A VII - 50 B III - 42 0 C VI - 60 11 D V - 20 10 6 10 25 0 0 8 21 17 15 10 8 15 0 10 5 2 0 7 6 0 0 9 Illustration 3. Average time taken by an operator on a speciic machine is tabulated below. The management is considering replacing one of the old machines by a new one and the estimated time for operation by each operator on the new machine is also indicated. Machines Operation M1 M2 M3 M4 M5 M6 New 01 2 3 2 1 4 5 6 02 4 4 6 3 2 5 1 03 6 10 8 4 7 6 1 04 8 7 6 5 3 9 4 05 7 3 4 5 4 3 12 06 5 5 6 7 8 1 6 (a) Find out an allocation of operators to the old machines to achieve a minimum operation time. (b) Reset the problem with the new machine and ind out the allocation of the operators to each machine and comment on whether it is advantageous to replace an old machine to achieve a reduction in operating time only. (c) How will the operators be reallocated to the machines after replacement? solution: 62 Operation M1 M2 M3 M4 M5 M6 New 01 2 3 2 1 4 5 6 02 4 4 6 3 2 5 1 03 6 10 8 4 7 6 1 04 8 7 6 5 3 9 4 05 7 3 4 5 4 3 12 06 5 5 6 7 8 1 6 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (a) Row operation 2 3 2 1 4 5 1 2 1 0 3 4 4 4 6 3 2 5 2 2 4 1 0 3 6 10 8 4 7 6 2 6 4 0 3 2 8 7 6 5 3 9 5 4 3 2 0 6 7 3 4 5 4 3 4 0 1 2 1 0 5 5 6 7 8 1 4 4 5 6 7 0 column operation Improved matrix 0 2 0 0 3 4 0 2 0 1 4 5 1 2 3 1 0 3 0 1 2 1 0 3 1 6 3 0 3 2 0 5 2 0 3 2 4 4 2 2 0 6 3 3 1 2 0 6 3 0 0 2 1 0 3 0 0 3 2 1 3 4 4 6 7 0 2 3 3 6 7 0 01 M3 - 2 02 M1 - 4 03 M4 - 4 04 M5 - 3 05 M2 - 3 06 M6 - 1 17 Hours Minimum Operation Time (b) & (c) Row operation 2 3 2 1 4 5 6 1 2 1 0 3 4 5 4 4 6 3 2 5 1 2 2 4 1 0 3 0 6 10 8 4 7 6 1 2 6 4 0 3 2 0 8 7 6 5 3 9 4 5 4 3 2 0 6 1 7 3 4 5 4 3 12 4 0 1 2 1 0 9 5 5 6 7 8 1 6 4 4 5 6 7 0 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 63 Production Planning and Control Improved Matrix 0 1 0 0 3 4 5 01 M1 - 2 2 2 4 2 1 4 0 02 M4 - 3 4 8 6 3 6 5 0 03 New - 1 4 3 2 2 0 6 1 04 M5 - 3 4 0 1 3 2 1 10 05 M2 - 3 3 3 4 6 7 0 5 06 M6 - 1 0 0 0 1 1 1 1 07 M3 - 0 13 Hours Minimum time In place of M3 new machine is to be replaced. 0 2 0 0 4 5 6 0 2 0 0 5 6 7 1 2 3 1 1 4 0 0 1 2 0 1 4 0 3 8 5 2 6 5 0 2 7 4 1 6 5 0 3 3 1 1 0 6 1 2 2 0 0 0 6 1 3 0 0 2 2 1 10 3 0 0 2 3 2 11 2 3 3 5 7 0 5 1 2 2 4 7 0 5 0 1 0 1 2 2 2 0 1 0 1 3 3 3 Illustration 4. Six salesmen are to be allocated to six sales regions so that the cost of allocation of the job will be minimum. Each salesman is capable of doing the job at different cost in each region. The cost matrix is given below: Region Salesmen I II III IV V VI A 15 35 0 25 10 45 B 40 5 45 20 15 20 C 25 60 10 65 25 10 D 25 20 35 10 25 60 E 30 70 40 5 40 50 F 10 25 30 40 50 15 (Figures are in Rupees) (a) Find the allocation to give minimum cost what is the cost? (b) Now suppose the above table gives earning of each salesman at each region. How can you ind an allocation so that the earning will be maximum? Determine the solution with optimum earning. (c) There are restrictions for commercial reasons that A cannot be posted to region V and E cannot be posted to region II. Write down the cost matrix suitably after imposing the restrictions. 64 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT solution: Row operation 15 35 0 25 10 45 15 35 0 25 10 45 40 5 45 20 15 20 35 0 40 15 10 15 25 60 10 65 25 10 15 50 0 55 15 0 25 20 35 10 25 60 15 10 25 0 15 50 30 70 40 5 40 50 25 65 35 0 35 45 10 25 30 40 50 15 0 15 20 30 40 5 column operation Improved Matrix 15 35 0 25 10 45 20 35 0 30 0 45 35 0 40 15 0 15 40 0 40 20 0 15 15 50 0 55 5 0 20 50 0 60 5 0 15 10 25 0 5 50 15 5 20 0 0 45 25 65 35 0 25 45 25 60 30 0 20 40 0 15 20 30 30 5 0 10 15 30 30 0 A III - 0 B II - 5 C VI - 10 D V - 25 E IV - 5 F I - 10 ` 55 Minimum Cost (b) loss Matrix Row operation 55 35 70 45 60 25 30 10 45 20 35 0 30 65 25 50 55 50 5 40 0 25 30 25 45 10 60 5 45 60 40 5 55 0 40 55 45 50 35 60 45 10 35 40 25 50 35 0 40 0 30 65 30 20 40 0 30 65 30 20 60 45 40 30 20 55 40 25 20 10 0 35 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 65 Production Planning and Control column operation Improved Matrix 5 10 25 0 25 10 45 20 35 0 0 40 0 25 30 25 20 35 0 60 0 15 50 45 5 35 0 40 55 35 5 55 0 40 55 15 30 40 25 50 35 0 10 40 5 50 35 0 35 0 30 65 30 20 15 0 10 65 30 20 35 25 20 10 0 35 15 25 0 10 0 35 0 10 20 20 30 0 A I - 15 0 65 0 50 50 50 B III - 45 10 5 30 0 35 55 C IV - 65 5 40 0 50 30 0 D VI - 60 10 0 5 65 25 20 E II - 70 15 30 0 15 0 40 F I - 50 ` 305 Maximum (c) The cost matrix after imposing the given restriction is Region Sales man I II III IV V VI A 15 35 0 25 α 45 B 40 5 45 20 15 10 C 25 60 10 65 25 10 D 25 20 35 10 25 60 E 30 α 40 5 40 50 F 10 25 30 40 50 15 Illustration 5. Four jobs can be processed on four different machines, one job on one machine. Resulting proits vary with assignments. They are given below: Machines Jobs I 42 35 28 21 II 30 25 20 15 III 30 25 20 15 IV 24 20 16 12 Find the optimum assignment of jobs to machines and the corresponding proit. 66 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT solution: Proit Matrix 0 7 14 21 12 17 22 27 12 17 22 27 18 12 26 30 Row operation 0 7 14 21 0 5 10 15 0 5 10 15 0 4 8 12 column operation 0 3 6 9 0 1 2 3 0 1 2 3 0 0 0 0 Improved Matrix 0 2 5 8 0 0 1 2 0 0 1 2 1 0 0 0 Further Improved 0 2 4 7 0 0 0 1 0 0 0 1 2 1 0 0 I - 1 - 42 II - 2 - 25 III - 3 - 20 IV - 4 - 12 99 Maximum Proit ` 99 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 67 Production Planning and Control 4.4 scHEDulINg scheduling: ‘Scheduling’ is the next important function of production planning and control after ‘Routing’. It determines the starting and the completion timings for each of the operations with a view to engage every machine and operator of the system for the maximum possible time and; without imposing unnecessary burden over them. Scheduling is the determination of the time that should be inquired to perform each operation and also the time that should be required to perform the entire series as routed. Scheduling involves establishing the amount of work to be done and the time when each element of the work will start or the order of the work. Scheduling technique is an important technique of determining the starting and the completion timings of each operation and that of the total manufacturing process so that the man and machines can be utilised to the maximum. Scheduling depends upon a number of factors, e.g., routing, the method of production, quantity of production, transportation of raw materials, production capacity, the probable data of delivery speciied by customers in their orders and the past records. Relationship between ‘Routing’ and ‘Scheduling’. ‘Routing’ and ‘Scheduling’ are independent and either of these activities cannot be undertaken independently. It is very dificult to prepare schedules without determining the routing of sequence of operations. Routing is the prerequisite of scheduling. Unless route or sequence of operations, tools, equipment and plants and the persons by when operations are to be performed, are established, the time taken by each operation, the idle time of men and machine and total time for the whole process cannot be ascertained in a convincing manner. Conversely, scheduling is equally important for routing. It is quite dificult to route an item eficiently through a plant without consulting previously-designed schedules. The main aim of routing is to pass the item through the process of manufacture by a route which is the best and the most economical. And a route or sequence of operations may be considered best which utilises the men, materials and machines to the maximum and which consumes the shortest time during the process of production. This information (time schedule of each operation) can be obtained from schedules. So, scheduling is necessary for effective routing. Thus, we can conclude that routing and scheduling are inter-related, inter-connected and inter-dependent activities of production planning and control. Relationship between Routing and scheduling: Both are interconnected as scheduling is dificult without routing and routing is also not effective without scheduling. Routing is a prerequisite for scheduling while time to be taken ‘may form the basis of routing and that is ixed by scheduling. principles of scheduling: The principles of scheduling are: (a) The principle of optimum task size: Scheduling tends to achieve its maximum eficiency when the task sizes are small and all tasks are of the same order of magnitude. (b) The principle of the optimum Production plan: Scheduling tends to achieve its maximum eficiency when the work is planned, so that it imposes an equal/even load on all the plant. (c) The principle of the optimum operation sequence: Scheduling tends to achieve its maximum eficiency when the work is planned so that the work centers are normally used in the same sequence. The irst principle has a tendency when applied, not only give good results but also to be self-correcting if it is ignored. For example, if in a functional batch production machine shop the loads imposed by different operations vary greatly in length it is possible that it will be necessary to break many of the long operations into one or more small batches, in order to get the other orders completed by due date. In effect, this principle only repeats the known advantage of maintaining a high rate of stock turn over, and of single phase ordering. The second principle merely states that the obvious fact that there will be less idle time and waiting time, if all the plant is evenly loaded by the production planners, then if some of the machines are over loaded perhaps because direct labour cost 68 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT on them are lower and others are idle for part of the time due to shortage of work. The third principle says about principle of low. Some times it is also true if we sequence some jobs, which need the same machine set up, at a time, this avoids machine ancillary time needed, in case, the jobs of the above type are done at different times. For example, consider drilling a 10 mm hole in ive different jobs may be done at a time so that the set up time required for ive jobs Forms of schedules: Here we shall discuss the presentation of production schedules. Depending on the need and use, the Schedules can be prepared in different forms. A production Flow program: If a number of components or assemblies have to be manufactured for the inal assembly line and those components are to be made concurrently, the production master low program is prepared taking into account the sequence of operations and the time of starting and ending each component in order to comply with the required date of completion of the product. The necessary document for this is Operation Process Chart and the Sequence of Operation. scheduling systems: Scheduling Systems may be classiied into four groups as shown below: (i) Unit scheduling system: This is used for scheduling when jobs are produced one by and are of different a type that is for job production. (ii) Batch scheduling system: When jobs are produced to order, in batches, this is used. (iii) Mass scheduling system: When large number of items of similar type are produced that is in mass production, this is used. unit scheduling system: Here we have two types of scheduling, one is Project scheduling and the other is Job Scheduling. Project Scheduling: Generally, a project consists of number of activities managed by defferent Apartments or individual supervisors. It can also be said as a complex output made up of many interdependent jobs. Examples are: Railway coach building, Shipbuilding etc. The scheduling methods used are: (i) Project Evaluation and Review Technique (PERT), (ii) Critical Path Method (CPM), (iii) Graphical Evaluation and Review Technique (GERT). We can also use Bar charts, GANTT charts, Milestone chart, but these are less superior to the above. Job Shop Scheduling: In Job shop scheduling, we come across varieties of jobs to be processed on different types of machines. Separate records are to be maintained for each order. Only after receiving the order, one has to plan for production of the job. The routing is to be speciied only after taking the order. Scheduling is done to see that the available resources are used optimally. The following are some of the methods used for scheduling. (i) Arrival pattern of the job, (ii) Processing pattern of the job, (iii) Depending on the type of machine used, (iv) Number of workers available in the shop, (v) Order of sequencing. Arrival pattern of the job: This is done in two ways. Firstly, as and when the order is received, it is processed on the principle First in First Out (FIFO). Otherwise, if the orders are received from single customer at different point of time in a week/month, then the production manager pile up all orders and starts production depending on the delivery date and convenience (This situation is generally known as static situation). Processing Pattern of the Job: As the layout of Job shops of Process type and there may be duplication of certain machines, the production planner, after receiving the order thinks of the various methods of converting OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 69 Production Planning and Control the requirement of customer / order into a production plan to suit the available facilities. Depending on the process required, there may be backtracking, which is unavoidable. When facilities are busily engaged, in process inventory may be a common problem. Machine varieties available: Facilities available in the production shop will affect the scheduling. Here the size, capacity, precession and other factors of machines will have their inluence on the scheduling. Number of Men in the production shop: Many a time we see that the number of workers available in the job shops are very much limited, that is sometimes they are less in number than the machines in the shop (these shops are known as labour limited shop). Depending the availability of labour, the scheduling is to be done. In case the machines available are limited and have more men (known as machine limited shops), then availability of machine dictates the scheduling. Sequencing rules for single facility: When we have a single facility, and the orders are in queue, then they are processed depending on the rules mentioned below: (a) First in irst served or irst in irst out (FIFS/FIFO): Here the jobs are processed as they come in. This is commonly observed queue discipline. (b) Shortest processing time (SPT): The jobs having shortest processing time are processed irst. This is just to avoid formation of queue. For example, when you go for Xeroxing a document, and other person comes for Xeroxing a book, then document is Xeroxed and then the book is taken for Xeroxing. (c) Minimum due date (MDD): Here jobs are processed in ascending order of their available time before delivery date. By doing so, we can keep up the delivery promises. To meet the delivery promises, if necessary, overtime, sub contracting etc., may be used. (d) Last come irst served or last in irst out (LCFS/LIFO): This generally happens in case of inventory stocking and using. When material piles up, the material at the top i.e., material last arrived is used irst. (e) Static slack for remaining operations (SSRO): Static slack is given by: (Due date - Remaining processing time/ number of remaining operations). Here jobs are processed in ascending order of the operations. (f) Dynamic slack for remaining operations (DSRO): Dynamic slack is given by: (Due date - expected time of remaining operations / number of remaining operations). Here the jobs are done in ascending order of the ratio dynamic slack. basic scheduling problems: The production planner may face certain problems while preparing production plans or Schedules. Some important problems are discussed below: (a) Flow production scheduling for luctuating demand (known smoothening problem), (b) Batch production scheduling, when products are manufactured consecutively, (c) The assignment problem, (d) Scheduling orders with random arrivals and (e) Product sequencing. Illustration 6. The processing times (tj) in hrs for the ive jobs of a single machine scheduling is given. Find the optimal sequence which will minimise the mean low time and ind the mean low time. Determine the sequence which will minimise the weighted mean low time and also ind the mean low time Job (j) 1 2 3 4 5 Processing time (tj) hrs 30 8 10 28 16 70 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT solution: (a) First arrange the jobs as per the shortest processing time (SPT) sequence. Job (j) 2 3 5 4 1 Processing time (tj) hrs 8 10 16 28 30 Therefore, the job sequence that minimises the mean low time is 2-3-5-4-1. Computation of minimum low time (F min) The low time is the amount of time the job ‘f’ spends in the system. It is a measure which indicates the waiting of jobs in the system. It is the difference between the completion time (Cj) and ready time (Rj) for job j. Fj = Cj - Rj Job (j) 2 3 5 4 1 Processing time (tj) hrs 8 10 16 28 30 Completion time (Cj) 8 18 34 62 92 Since the ready time (Rj) = 0 for all j, the mean low time (F) j is equal to Cj for all j. Mean low time n ( F ) = n1 ∑ F = 51 [8 + 18 + 34 + 62 + 92] = 51[214] = 42.8 hours j j =1 (b) The weights are given as follows: Job (j) 1 2 3 4 5 Processing time (tj) hrs 30 8 10 28 16 Weight (Wj) 1 2 1 2 3 The weighted processing time = Processing time (t j) Weight (W) j Processing time(tj ) Weight(WJ ) The weighted processing time is represented as Job (j) 1 2 3 4 5 Processing time (tj hrs) 30 8 10 28 16 Weight (Wj) 1 2 1 2 3 tj/Wj 30 4 10 14 5.31 Thus, arranging the jobs in the increasing order of tj/Wj (weighted shortest processing time WSPT). We have the optimal sequence that minimises the weighted mean low time is 2-5-3-4 -1 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 71 Production Planning and Control low time (Fw) : n ∑WF j j Fw = j =1 n ∑W j j =1 Job (j) 2 5 3 4 1 Processing time (tj) hrs 8 16 10 28 30 Fj = (Cj – Rj) 8 24 34 62 92 Wj 2 3 1 2 1 Fj x Wj 16 72 34 124 92 The weighted mean low time is computed as follows for optimal sequence. Weighted mean low time (Fw) is computed as Fw = (16 + 72 + 34 + 124 + 92) = 37.55 hrs. (2 + 3 + 1+ 2 + 1) Elements of scheduling (i) Demand forecasts/customer’s irm orders-determine the delivery dates for inished products. (ii) Aggregate scheduling : Tentative schedule based on demand for quarterly or monthly requirements. Enables employment of available resources in meeting the demand by adjusting the capacity. Needs rough-cut capacity planning. (iii) Production plan : Showing output levels planned, resource requirements, and capacity limitations and inventory levels. (iv) Master production schedule : Dates committed and desired quantity to be produced on a daily, weekly, monthly or quarterly basis. (v) Priority planning : Master schedule is exploded into components and parts that are required to produce the product. (vi) Capacity planning: Regulates loading of speciic jobs on speciic work centres or machines for speciic periods of time. (vii) Facility loading or machine loading: Loading work centres/Machines after deciding which job to be assigned to which work centre/machine i.e., actual assignment of jobs to machines taking into consideration priority sequencing and machine utilisation. (viii) Evaluation of workload : To balance the workload on various work centres /machines when resources are scarce or limited. Excess load in one work centre or machine has to be transferred to other work centre or machine having spare capacity. (ix) Sequencing : Priority sequencing of jobs is done to maximise worklow through work-centres or machines to minimise delay and cost of production. 72 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 4.5 QuEuINg MoDEls general structure of Queuing system The general structure of a queuing system is depicted in Figure 4.5.1 Input population Arrival process Queue Queue structure Service system Customers leave the system Service mechanism Fig. 4.5.1 general structure of the Queuing system We shall discuss in more details the various elements of a queuing system and then present mathematical results for some speciic systems. The elements of a system are: 1. Arrival process: The arrivals from the input population may be classiied on different bases as follows: (a) According to source: The source of customers for a queuing system can be ininite or inite. For example, all people of a city or state (and others) could be the potential customers at a superbazar. The number of people being very large, it can be taken to be ininite. On the other hand, there are many situations in business and industrial conditions where we cannot consider the population to be ininite — it is inite. Thus, the ten machines in a factory requiring repairs and maintenance by the maintenance crew would exemplify inite population. Removing one machine from a small, inite, population like this will have a noticeable effect on the calls expected to be made (for repairing) by the remaining machines than if there were a large number of machines, say 500. (b) According to numbers: The customers may arrive for service individually or in groups. Single arrivals are illustrated by customers visiting a beautician, students reaching at a library counter, and so on. On the other hand, families visiting restaurants, ships discharging cargo at a dock are examples of bulk, or batch, arrivals. (c) According to line: Customers may arrive in the system at known (regular or otherwise)’times, or they might arrive in a random way. The queuing models wherein customers’ arrival times are known with certainty are categorized as deterministic models (insofar as this characteristic is concerned) and are easier to handle. On the other hand, a substantial majority of the queuing models are based on the premise that the customers enter the system stochastically, at random points in time. With random arrivals, the number of customers reaching the system per unit time might be described by a probability distribution. Although the arrivals might follow any pattern, the frequently employed assumption, which adequately supports many real world situations, is that the arrivals are Poisson distributed. 2. service system: There are two aspects of a service system— (a) structure of the service system, and (b) the speed of service. (a) structure of the service system: By structure of the service system we mean how the service facilities exist. There are several possibilities. For example, there may be (i) A single service facility A library counter is an example of this. The models that involve a single service facility are called single server models. Figure 4.5.2(a) illustrates such a model. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 73 Production Planning and Control Fig. 4.5.2 (a): single server, single Queue Model (ii) Multiple, parallel facilities with single queue: That is, there is more than one server. The term parallel implies that each server provides the same type of facility. Booking at a service station that has several mechanics, each handling one vehicle, illustrates this type of model. It is shown in Figure 4.5.2 (b). Fig. 4.5.2 (b): Multiple, parallel servers, single Queue Model (iii) Multiple, parallel facilities with multiple queues: This type of model is different from the earlier one only in that each of the servers has a different queue. Different cash counters in an electricity ofice where the customers can make payment in respect of their electricity bills provide an example of this type of model. Figure 4.5.2 (c) portrays such a model. Fig. 4.5.2 (c): Multiple, parallel servers, Multiple Queues Model (iv) service facilities in a series: In this, a customer enters the irst station and gets a portion of service and then moves on to the next station, gets some service and then again moves on to the next station . . . and so on, and inally leaves the system, having received the complete service. For example, machining of a certain steel item may consist-of cutting, turning, knurling, drilling, grinding, and packaging operations, each of which is performed by a single server in a series. Figure 4.5.2 (d) shows such a situation. Fig. 4.5.2 (d): Multiple servers in series 74 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Besides these, there may be other possibilities as well. (b) speed of service: In a queuing system, the speed with which service is provided can be expressed in either of two ways—as service rate and as service time. The service rate describes the number of customers serviced during a particular time period. The service time indicates the amount of time needed to service a customer. Service rates and times are reciprocals of each other and either of them is suficient to indicate the capacity of the facility. Thus, if a cashier can attend, on the average, to 10 customers in an hour, the service rate would be expressed as 10 customers/hour and service time would be equal to 6 minutes/customer, Generally, however, we consider the service time only, If these service times are known exactly, the problem can be handled easily. But, as generally happens, if these are different and not known with certainty, we have to consider the distribution of the service times in order to analyse the queuing system. Generally, the queuing models are based on the assumption that service times are exponentially distributed about some average service time. 3. Queue structure: Another element of a queuing system is the queue structure. In the queue structure, the important thing to know is the queue discipline which means the order by which customers are picked up from the waiting line for service. There are a number of possibilities. They are: (a) First-come-irst-served: When the order of service of customers is in the order of their arrival, the queue discipline is of the irst-come-irst-served type. For example, with a queue at the bus stop, the people who came irst will board the bus irst. (b) Last-come-irst-served: Sometimes, the customers are serviced in an order reverse of the order in which they enter so that the ones who join the last are served irst. For example, assume that letters to be typed, or order forms to be processed accumulate in a pile, each new addition being put on the top of them. The typist or the clerk might process these letters or orders by taking each new task from the top of the pile. Thus, a just arriving task would be the next to be serviced provided that no fresh task arrives before it is picked up. Similarly, the people who join an elevator last are the irst ones to leave it. (c) service-in-random-order (sIRo): Random order of service is deined as: whenever a customer is chosen for service, the selection is made in a way that every customer in the queue is equally likely to be selected. The time of arrival of the customers is, therefore, of no consequence in such a case. (d) priority service: The customers in a queue might be rendered service on a priority basis. Thus, customers may be called according to some identiiable characteristic (length of job, for example) for service. Treatment of VIPs in preference to other patients in a hospital is an example in point. For the queuing models that we shall consider, the assumption would be that the customers are serviced on the irst-come-irst-served basis. Another thing to consider in the queuing structure is the behaviour or attitude of the customers entering the queuing system. On this basis, the customers may be classiied as being (a) patient or (b) impatient. If the customers join a queue, when it exists, and wait till they enter the service station for getting service they are called patient customers. On the other hand, the queuing systems may enjoy customer behaviour in the form of defections from the queue. The customers may not select queues randomly (if there are multiple queues) and look for the shortest queue. There may be jockeying among the many queues, that is the customers may switch to other queues which are moving ‘fast’, and also reneging is possible—when a customer stands in the queue for sometime and then leaves the system because it is working ‘too slowly’. There may also be bribing or cheating by some customers for queue positions. Besides, some customers may, upon their arrival, not join the queue for some reason and decide to return for service at a later time, or may even abandon the input population altogether. In terms of the queuing theory, this is known as balking, and occurs particularly when there are limits on the time and the extent of storage capacity available to hold waiting customers. Unless otherwise speciied, the storage capacity is taken to be ininite. In the queuing models that we consider, we shall assume that there is no balking or jockeying and that the customers leave the system only after receiving service, and not before. Mathematical models give way to simulation when this assumption breaks. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 75 Production Planning and Control operating characteristics of Queuing system An analysis of a given queuing system involves a study of its different operating characteristics. This is done using queuing models. Some of the more commonly considered characteristics are discussed below: 1. Queue length—the average number of customers in the queue waiting to get service. Large queues may indicate poor server performance while small queues may imply too much server capacity. 2. system length—the average number of customers in the system, those waiting to be and those being serviced. Large values of this statistic imply congestion and possible customer dissatisfaction and a potential need for greater service capacity, 3. Waiting time in the queue—the average time that a customer has to wait in the queue to get service. Long waiting times are directly related to customer dissatisfaction and potential loss of future revenues, while very small waiting times may indicate too much service capacity. 4. Total time in the system—the average time that a customer spends in the system, from entry in the queue to completion of service. Large values of this statistic are indicative of the need to make adjustment in the capacity. 5. server idle time—the relative frequency with which the service system is idle, Idle time is directly related to cost. However, reducing idle time may have adverse effects on the other characteristics mentioned above. We now proceed to discuss some of the queuing models. It may be mentioned here that the results obtained from various models are based on the assumption that the service system is operating under equilibrium or steady state conditions. For many systems, the operating day begins in transient state with no customers in the system. It takes some initial time interval for enough customers to arrive such that a steady state balance is reached. It should be clearly understood that a steady state does not mean that the system will reach a point where the number of customers in the system never changes. Even when the system reaches equilibrium, luctuations will occur. A steady state condition really implies that various system performance measures (the operating characteristics) would reach stable values. characteristics of Waiting lines There are numerous queuing models from which an analyst can choose. Naturally, much of the success of the analysis will depend on choosing an appropriate model. Model choice is affected by the characteristics of the system under investigation. The main characteristics are — 1. Population source. 2. Number of servers (channels) 3. Arrival and service patterns. 4. Queue discipline (order of service). Fig 2.5.3: A simple queuing system 76 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT population source The approach to use in analyzing a queuing problem depends on whether the potential number of customers is limited. There are two possibilities: ininite-source and inite-source populations. In an ininite-source situation, the potential number of customers greatly exceeds system capacity. Ininite-source situations exist whenever service is unrestricted. Examples are supermarkets, drugstores, banks, restaurants, theaters, amusement centers, and toll bridges. Theoretically, large numbers of customers from the “calling population” can request service at any time. When the potential number of customers is limited, a inite-source situation exists. An example is the repairman responsible for a certain number of machines in a company. The potential number of machines that time cannot exceed the number of machines assigned to be repairer. Similarly, an operator may be responsible for loading and unloading a bank of four machines, a nurse may be responsible for answering patient calls for a 10-bed ward, a secretary may be responsible for taking dictation from three executives, and a company shop may perform repairs as needed on the irm’s 20 trucks. Number of servers (channels) channel A server in a service system: The capacity of queuing systems is a function of a capacity of each server and the number of servers being used. The terms server and channel are synonymous, and it is generally assumed that each channel can handle one customer at a time. Systems can be either single-or multiple-channel. (A group of servers working together as a team, such as a surgical team, is treated as a single-channel system.) Examples of single-channel systems are small grocery stores with one checkout counter, some theaters, single-bay car washes, and drive-in banks with one teller. Multiple-channel systems (those with more than one server) are commonly found in banks, at airline ticket counters, at auto service centers, and at gas stations. A related distinction is the number of steps or phases in a queuing system. For example, at theme parks, people go from one attraction to another. Each attraction constitutes a separate phase where queues can (and usually do) from. Figure 4.5.4 illustrates some of the most common queuing systems. Because it would not be possible to cover all of these cases in suficient detail in the limited amount of space available here, our discussion will focus on singlephase systems. Fig. 4.5.4: Four common variations of queuing systems Queue Discipline Queue discipline refers to the order in which customers are processed. All but one of the models to be described shortly assume that service is provided on a irst-come, irst-served basis. This is perhaps the most commonly OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 77 Production Planning and Control encountered rule. There is irst-come service at banks, stores, theaters, restaurants, four-way stop signs, registration lines, and so on. Examples of systems that do not serve on a irst-come basis include hospital emergency rooms, rush orders in a factory, and main frame computer processing of jobs. In these and similar situations, customers do not all represent the same waiting costs; those with the highest costs (e.g., the most seriously ill) are processed irst, even though other customers may have arrived earlier. Fig. 4.5.5: The average number waiting in line and the average time customers wait in line increase exponentially as the system utilization increases Measures of waiting-line performance The operations manager typically looks at ive measures when evaluating existing or proposed service systems. They relate to potential customer dissatisfaction and costs: 1. The average number of customers waiting, either in line or in the system. 2. The average time customers wait, either in line or in the system. 3. System utilization, which refers to the percentage of capacity utilized. 4. The implied cost of a given level of capacity and its related waiting line. 5. The probability that an arrival will have to wait for service. Of these measures, system utilization bars some elaboration. It relects the extent to which the servers are busy rather than idle. One the surface, it might seem that the operations manager would want to seek 100 percent utilization. However, as Figure 2.8.7 illustrates, increases in system utilization are achieved at the expense of increases in both the length of the waiting line and the average waiting time. In fact, these values become exceedingly large as utilization approaches 100 percent. The implication is that under normal circumstances, 100 per cent utilization is not a realistic goal. Even if it were, 100 per cent utilization of service personnel is not good; they need some slack time. Thus, instead, the operations manager should try to achieve a system that minimizes the sum of waiting costs and capacity costs. Queuing Models: Ininite-source Many queuing models are available for a manager or analyst to choose from. The discussion here includes four of the most basic and most widely used models. The purpose is to provide an exposure to a range of models rather than an extensive coverage of the ield. All assume a Poisson arrival rate. Moreover, the models pertain to a system operating under steady-state conditions; that is, they assume the average arrival and service rates are stable. The four models described are 1. Single server, exponential service time. 2. Single server, constant service time. 78 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 3. Multiple servers, exponential service time. 4. Multiple priority service, exponential service time. Note that the terms “server” and “channel” mean the same thing. To facilitate your use of waiting line models, Table 4.5 provides a list of the symbols used for the ininite-source models. Table 4.5 Ininite-source symbols symbol Represents λ Customer arrival rate µ Service rate per server La The average number of customers waiting for service Ls The average number of customers in the system (waiting and/or being served) r The average number of customers being served p The system utilization Wq The average time customers wait in line Ws The average time customer’s spend in the system (waiting in line and service time) 1/ µ Service time Po The probability of zero units in the system Pn The probability of n units in the system M The number of servers (channels) Lmax The maximum expected number waiting in line basic Relationships There are certain basic relationships that hold for all ininite-source models. Knowledge of these can be very helpful in deriving desired performance measures, given a few key values. Here are the basic relationships: Note: The arrival and service rates, represented by λ and µ , must be in the same units (e.g., customers per hour, customers per minute). system utilization: This relects the ratio of demand (as measured by the arrival rate) to supply or capacity (as measured by the product of the number of servers, M, and the service rate, µ). λ µ The average number of customers being served: λ µ For nearly all queuing systems, there is a relationship between the average time a unit spends in the system or queue and the average number of units in the system or queue. According to Little’s law, for a stable system, the average number of customers in line or in the system is equal to the average customer arrival rate multiplied by the average time in line or the system. That is, Ls = λWs, and Lq = λWq The implications of this are important to analysis of waiting lines. The relationships are independent of any probability distribution and require no assumptions about which customers arrive or are serviced, or the order in which they are served. It also means that knowledge of any two of the three variables can be used to obtain the third variable. For example, knowing the arrival rate and the average number in line, one can solve for the average waiting time. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 79 Production Planning and Control Figure 4.5.6: basic Relationships line + service = system + = Ls + = Customers 000 Average number waiting: Lq Average time waiting: Ws The average number of customers Waiting in line for service: Lq [Model dependent. Obtain using a table or formula.] In the system (line plus being served): Ls = Lq + r The average time customers are Waiting in line: In the system: All ininite-source models require that system utilization be less than 1.0; the models apply only to underloaded systems. The average number waiting in line, Lq, is a key value because it is a determinant of some of the other measures of system performance, such as the average number in the system, the average time in line, and the average time in the system. Hence, Lq will usually be one of the irst values you will want to determine in problem solving. Illustration 7. Customers arrive at a bakery at an average rate of 16 per hour on weekday mornings. The arrival distribution can be described by a Poisson distribution with a mean of 16. Each clerk can serve a customer in an average of three minutes; this time can be described by an exponential distribution with a mean of 3.0 minutes. a. What are the arrival and service rates? b. Compute the average number of customers being served at any time. c. Suppose it has been determined that the average number of customers waiting in line is 3.2. compute the average number of customers in the system (i.e., waiting in line or being served), the average time customers wait in line, and the average time in the system. d. Determine the system utilization for M = 1, 2, and 3 servers. solution: a. b. 80 The arrival rate is given in the problem: λ = 16 customers per hour. Change the service time to a comparable hourly rate by irst restating the time in hours and then taking its reciprocal. Thus, (3 minutes per customer)/(60 minutes per hour) = 1/20 = 1/ µ. Its reciprocal is µ = 20 customers per hour. r= λ 16 = 0.80 customer. = µ 20 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Table 4.5.2: Formulas for basic single-server model performance Measure Equation Average number in line Probability of zero units in the system Probability of n units in the system Probability of less than n units in the system c. Given: Lq = 3.2 customers Ls = Lq + r = 3.2 + .80 = 4.0 customers = 0.20 hour, or 0.20 hour x 60 minutes/hour = 12 minutes Ws = Waiting in line plus service hour, or 15 minutes d. System utilization is p = λ . Mµ For M = 1, ρ = 16 = 0.80 1(20) For M = 2, ρ = 16 = 0.40 2(20) For M = 3, ρ = 16 = 0.27 3(20) Note that as the system capacity is measured by Mµ increases, the system utilization for a given arrival rate decreases. single server, exponential service time, M/M/1 The simplest model involves a system that has one server (or a single crew). The queue discipline is irst-come, irstserved, and it is assumed that the customer arrival rate can be approximate by a Poisson distribution and service time by a negative exponential distribution. There is no limit on length of queue. Illustration 8. An airline is planning to open a satellite ticket desk in a new shopping plaza, staffed by one ticket agent. It is estimated that requests for tickets and information will average 15 per hour, and requests will have a Poisson distribution. Service time is assumed to be exponentially distributed. Previous experience with similar satellite operations suggests that mean service time should average about three minutes per request. Determine each of the following: a. System utilization. b. Percentage of time the server (agent) will be idle. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 81 Production Planning and Control c. The expected number of customers waiting to be served. d. The average time customers will spend in the system. The probability of zero customers in the system and the probability of four customers in the system. solution: λ = 15 customers per hour µ= 1 1customer × 60 minutes per hour = Service time 3 minutes = 20 customers per hour λ 15 = 0.75 = M µ 1(20) a. ρ= b. Percentage idel time = 1– 0.75 = 0.25, or 25 percent c. d. e. P0 = 1− 15 0.25 and λ = 1− =. 20 µ single server, constant service Time, M/D/1 As noted previously, waiting lines are a consequence of random, highly variable arrival and service rates. If a system can reduce or eliminate the variability of either or both, it can shorten waiting lines noticeably. A case in point is a system with constant service time. The effect of a constant service time is to cut in half the average number of customers waiting in line: The average time customers spend waiting in line is also cut in half. Similar improvements can be realized by smoothing arrival times (e.g., by use of appointments). Illustration 9. Wanda’s Car Wash & Cry is an automatic, ive-minute operation with a single bay. One a typical Saturday morning, cars arrive at a mean rate of eight per hour, with arrivals tending to follow a Poisson distribution. Find a. The average number of cars in line. b. The average time cars spend in line and service. solution: λ = 8 cars per hour μ = 1 per 5 minutes, or 12 per hour Lq = 82 = 0.667 car OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Illustration 10. A departmental store has one cashier. During the rush hours, customers arrive at a rate of 20 customers per hour. The average number of customers that can be handled by the cashier is 24 per hour. Assume the conditions for use of the single – channel queuing model. Find out average time a customer spends in the system. Answer : The usual notations are given: Arrival Rate λ = 20 customer / hour and service rate μ = 24 customers / hour Ls = λ 20 20 = 5 customers = = 4 µ − λ 24 − 20 Illustration 11. As a tool service centre the arrival rate is two per hour and the service potential is three per hour. Simple queue conditions exist. The hourly wage paid to the attendant at the service centre is `1.50 per hour and the hourly cost of a machinist away from his work is ` 4. Calculate: (i) The average number of machinists being served or waiting to be served at any given time. (ii) The average time a machinist spends waiting for service. (iii) The total cost of operating the system for an eight – hour day. (iv) The cost of the system if there were two attendants working together as a team, each paid ` 1.50 per hour and each able to service on average ` 2 per hour. Answer: Arrival rate = λ = 2 per hour Service rate μ = 3 per hour (i) Average number of machinists being served or waiting to be served at any given time: Ln = (ii) 2 λ = =2 µ−λ 3−2 Average Time a machinist spends waiting for the services: Wq = 1 2 1 λ = 0.667 hours × = × µ (µ − λ) 3 (3 − 2) It means a machinist spends 40 minutes (ie., 60 × 0.667) in the queue. (iii) Average time in the system Ws = 1 1 = 1 hours = (µ − λ) (3 − 2) Average number of machinists in the system = 2 [As per (i) above] Cost of two machinists being away from work = ` 4 x 2 = `8.00 per hour Attendant cost = 1.50 per hour 9.50 per hour Cost of 8- hour day = 8 hrs x `9.50 = `76.00 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 83 Production Planning and Control (iv) It is assumed that there is still a single service point, but the average service rater is now 4 per hour \ Now λ = 2 per hour Μ = 4 per hour \ Average number in the system Ln = λ 2 =1 = µ−λ 4−2 Average time spent in the system Ws = 1 1 1 = = µ−λ 4−2 2 Machinists cost = ½ hr × `4 = Attendant cost Total Cost `2.00 3.00 5.00 Cost per 8 – hour day = `5 × 8 hrs. = `40.00 Illustration 12. Workers come to tool store room to enquire about special tools (required by them) for accomplishing a particular project assigned to them. The average time between two arrivals is 60 seconds and the arrivals are assumed to be in Poisson distribution. The average service time (of the tool room attendant) is 40 seconds. Determine: (i) average queue length, (ii) average length of non-empty queues, (iii) average number of workers in system including the worker being attended (iv) mean waiting time of an arrival, (v) average waiting time of an arrival who waits. Answer: Here, λ = 60 per second = 1 per minute 60 µ = 60 per second =1.5 per minute 40 (i) Average queue length: 1 1 1 4 λ λ × = × = = workiers µ µ − λ 1.5 1.5 − 1 0.75 3 Lq = (ii) Average length of non-empty queues: Ln = (iii) Average number of workers in the system: Ls = (iv) µ 1 = = 3 workers µ − λ 1.5 − 1 1 λ = = 2 workers µ − λ 1.5 − 1 Mean waiting time of an arrival Wq = (v) Average waiting time of an arrival who waits Wn = 84 1  1  3 λ  λ  × = × = minutes µ  µ − λ  1.5  1.5 − 1 4 1 1 = 2 minutes = µ − λ 1.5 − 1 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 4.6 sIMulATIoN In the earlier chapters, we have absent analyse the characteristics of a given system. Such models are useful for determining optimal solutions. Especially the techniques of LPP, Transportation, and assignment are used for such optimization. However, all the business situations can not be solved with the above techniques only. There may be some complex situations, where numbers of assumptions are also necessary. It may be quite often possible to simulate the given system and study the behavior. To simulate means to imitate. In general, simulation involves developing a model of real phenomenon and then performing experiments on the model evolved. It is to be noted that it is a descriptive and not optimizing technique. In simulation, a given system is copied and the variables and constants associated with it are manipulated in that artiicial environment to examine the behavior of the system. For ex: aerodynamic testing, scaled down models of airplanes and placing term in worked tunnels etc. Thus, a businessman also in a complex situation a given system is taken and simulates for obtaining the required results. It consists of four phases: 1. Deinition of the problem and statement of objectives. 2. Construction of an appropriate model 3. Experimentation with the model constructed. 4. Evaluation of the results of simulation. Monte carlo simulation: Although simulation can be of many types, our discussion will focus on the probabilistic simulation using the Monte Carlo method. Also called computer simulation, it can be described as a numerical technique that involves modelling a stochastic system with objective of predicting the system’s behaviours. The chance element is a very signiicant feature of Monte Carlo simulation and this approach can be used when the given process has a random, or chance, component. In using the Monte Carlo method, a given problem is solved by simulating the original data with random number generators. Basically, its use requires two things, irst, as mentioned earlier, we must have a model, that represents and image of the reality of the situation. Here the model refers to the probability distribution of the variable in question. What is signiicant here is that the variable may not be known to explicitly follow any of the theoretical distribution like Poisson, Normal and so on. The distribution may be obtained by direct observation or from past records. To illustrate, suppose, that a bakery keeps a record of the sale of the number of cakes of a certain type. Information relating to 200 days’ sales is Demand (No of cakes): 5 6 7 8 9 10 11 12 total (No of days) : 4 10 16 50 62 38 12 8 200 Illustration 13. State the major two reasons for using simulation to solve a problem A confectioner sells confectionery items. Past data of demand per week in hundred kilograms with frequency is given below: Demand/Week 0 5 10 15 20 25 Frequency 2 11 8 21 5 3 Using the following sequence of random numbers, generate the demand for the next 10 weeks. Also ind out the average demand per week. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 85 Production Planning and Control Random numbers 35 52 13 90 23 73 34 35 83 94 56 67 66 60 57 solution: Random No. Range Table for demand Demand per week Frequency probability cumulative probability Range 0 2 .04 .04 0-3 5 11 .22 .26 4-25 10 8 .16 .42 26-41 15 21 .42 .84 42-83 20 5 .10 .94 84-93 25 3 .06 1.00 94-99 ∑f = 50 1.00 simulated Values for next 10 weeks Weeks R. Nos. Demand 1 35 10 2 52 15 3 13 5 4 90 20 5 23 5 6 73 15 7 34 10 8 57 15 9 35 10 10 83 15 120 Average weekly demand = 120 = 12 10 Illustration 14. The manager of a book store has to decide the number of copies of a particular tax law book to order. A book costs ` 60 and is sold for ` 80. Since some of the tax laws change year after year, any copies unsold while the edition is current must be sold for ` 30. From past records, the distribution of demand for this book has been obtained as follows: Demand (No of copies) Proportion 15 16 17 18 19 20 21 22 0.05 0.08 0.20 0.45 0.10 0.07 0.03 0.02 Using the following sequence of random numbers, generate the demand for 20 time periods( years). Calculate the average proit obtainable under each of the courses of action open to the manager. What is the optimal policy? 86 14 02 93 99 18 71 37 30 12 10 88 13 00 57 69 32 18 08 92 73 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT solution: Random No. Range Table Demand probability cumulative probability Random Range 15 .05 .05 0-4 16 .08 .13 5-12 17 .20 .33 13-32 18 .45 .78 33-77 19 .10 .88 78-87 20 .07 .95 88-94 21 .03 .98 95-97 22 .02 1.00 98-99 1.00 Calculation of demand and proit for next 20 years year Random Numbers Expected demand 16 17 18 1 14 17 - - 1 2 02 15 1 2 3 3 93 20 - - - 4 99 22 - - - 5 18 17 - - 1 6 71 18 - - - 7 37 18 - - - 8 30 17 - - 1 9 12 16 - 1 2 10 10 16 - 1 2 11 88 20 - - - 12 13 17 - - 1 13 00 15 1 2 3 14 57 18 - - - 15 69 18 - - - 16 32 17 - - 1 17 18 17 - - 1 18 08 16 - 1 2 19 92 20 - - - 20 73 18 - - - 2 7 18 Total No. of books unsold if stock is OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 87 Production Planning and Control Statement Showing Computation of Proit No. of books order No. of books sold Proit Average Proit ` 6000 ` 300 15 15 x 20 = 300 16 16 x 20 – 2 = 318 ` 6300 (318 x 20) – 2 x 30 ` 315 17 (17 x 20) – 7 = 333 ` 6450 (333 x 20) -7 x 30 ` 322.5 18 (18 x 20) – 18 ` 6300 (342 x 20) – 18 x 30 ` 315 Since proit is more at 17 books order, it is the best quantity and ordering is more optimum. Illustration 15. A Small retailer has studied the weekly receipts and payments over the past 200 weeks and has developed the following set of information: Weekly Receipts (`) Probability Weekly Payments (`) Probability 3000 0.20 4000 0.30 5000 0.30 6000 0.40 7000 0.40 8000 0.20 12000 0.10 10000 0.10 Using the following set of random numbers, simulate the weekly pattern of receipts and payments for the 12 weeks of the next quarter, assuming further that the beginning bank balance is ` 8000. What is the estimated balance at the end of the 12 weekly period? What is the highest weekly balance during the quarter? What is the average weekly balance for the quarter? Random Numbers For Receipts 03 91 38 55 17 46 32 43 69 72 24 22 For payments 61 96 30 32 03 88 48 28 88 18 71 99 According to the given information, the random number interval is assigned to both the receipts and the payments. solution: Range of random numbers Receipt (`) probability cumulative probability Range payments (`) probability cumulative probability Range 3000 0.20 0.20 0-19 4000 0.30 0.30 0-29 5000 0.30 0.50 20-49 6000 0.40 0.70 30-69 7000 0.40 0.90 50-89 8000 0.20 0.90 70-89 12000 0.10 1.00 90-99 10000 0.10 1.00 90-99 88 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT simulation of Data for a period of 12 weeks Week Random No. for receipt Expected Receipt (`) Random No. for payment Expected payment (`) Opening Balance Week end balance (`) 8000 1 03 3000 61 6000 5000 (8000 + 3000 – 6000) 2 91 12000 96 10000 7000 3 38 5000 30 6000 6000 4 55 7000 32 6000 7000 5 17 3000 03 4000 6000 6 46 5000 88 8000 3000 7 32 5000 48 6000 2000 8 43 5000 28 4000 3000 9 69 7000 88 8000 2000 10 72 7000 18 4000 5000 11 24 5000 71 8000 2000 12 22 5000 99 10000 (3000) Estimated balance at the end of 12th week = ` (3,000) Highest balance = ` 7,000 Average balance during the quarter = 45,000/12 = ` 3,750 Illustration 16. An automobile production line turns out about 100 cars a day, but deviations occur owing to many causes. The production is more accurately described by the probability distribution given below: Production/Day Prob. Production/Day Prob. 95 0.03 101 0.15 96 0.05 102 0.10 97 0.07 103 0.07 98 0.10 104 0.05 99 0.15 105 0.03 100 0.20 Total 1.00 Finished cars are transported across the bay, at the end of each day, by ferry. If the ferry has space for only 101 cars, what will be the average number of cars waiting to be shipped, and what will be the average number of empty space on the boat? OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 89 Production Planning and Control solution: simulation of data of an Automobile production line production/day probability cumulative probability Random No. Range 95 0.03 0.03 0-2 96 0.05 0.08 3-7 97 0.07 0.15 8-14 98 0.10 0.25 15-24 99 0.15 0.40 25-39 100 0.20 0.60 40-59 101 0.15 0.75 60-74 102 0.10 0.85 75-84 103 0.07 0.92 85-91 104 0.05 0.97 92-96 0.03 1.00 97-99 105 1.00 stimulated data Random No. production No.of cars waiting to be shipped No. of empty space on the boat 1 20 98 - 3 2 63 101 - - 3 46 100 - 1 4 16 98 - 3 5 45 100 - 1 6 41 100 - 1 7 44 100 - 1 8 66 101 - - 9 87 103 2 - 10 26 99 - 2 11 78 102 1 - 12 40 100 - 1 13 29 99 - 2 14 92 104 3 - 15 21 98 - 3 6 18 Day Total Average no. of cars waiting to be shipped = 6/15 = 0.40 Average no. of empty space on the boat = 18/15 = 1.2 90 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Illustration 17. A book store wishes to carry ‘Ramayana’ in stock. Demand is probabilistic and replenishment of stock takes 2 days (i.e. if an order is placed on March 1, it will be delivered at the end of the day on March 3). The probabilities of demand are given below: Demand (daily) Probability 0 1 2 3 4 0.05 0.10 0.30 0.45 0.10 Each time an order is placed, the store incurs an ordering cost of ` 10 per order. The store also incurs a carrying cost of ` 0.50 per book per day. The inventory carrying cost in calculated on the basis of stock at the end of each day. The manager of the bookstore wishes to compare two options for his inventory decision. A. Order 5 books when the inventory at the beginning of the day plus order outstanding is less than 8 books. B. Order 8 books when the inventory at the beginning of the day plus order outstanding is less than 8. Currently (beginning 1st day) the store has a stock of 8 books plus 6 books ordered two days ago and expected to arrive next day. Using Monte-Carlo Simulation for 10 cycles, recommend, which option the manager, should choose. The two digit random numbers are given below: 89 34 70 63 61 81 39 16 13 73 solution: Demand Probability Cumulative Probability Range 0 0.05 0.05 0-4 1 0.10 0.15 5-14 2 0.30 0.45 15-44 3 0.45 0.90 45-89 4 0.10 1.00 90-99 option - A Day R No. Demand option stock order closing stock order placed 1 89 3 8 - 5 - 2 34 2 5 6 9 - 3 70 3 9 - 6 0 4 63 3 6 - 3 5 5 61 3 3 0 0 - 6 81 3 0 5 2 5 7 39 2 2 - 0 5 8 16 2 0 5 3 - 9 13 1 3 5 7 - 10 73 3 7 - 4 5 39+5 = 44 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 91 Production Planning and Control Ordering cost 4 x 10 ` 40 Ordering cost 0.5 x 44 ` 22 Total Cost ` 62 option b Day R No. Demand option orders received closing stock No. of orders 1 89 3 8 - 5 - 2 34 2 5 6 9 - 3 70 3 9 - 6 - 4 63 3 6 - 3 8 5 61 3 3 - 0 - 6 81 3 0 8 5 - 7 39 2 5 - 3 8 8 16 2 3 - 1 - 9 13 1 1 8 8 - 10 73 3 8 - 5 - 45 Ordering cost 2 x 10 ` 20.0 Ordering cost 0.5 x 45 ` 22.5 Total Cost ` 42.5 option ‘b’ is better because it has low Inventory costs. Illustration 18. After observing heavy congestion of customers over a period of time in a petrol station, Mr. Petro has decided to set up a petrol pump facility on his own in a nearby site. He has compiled statistics relating to the potential customer arrival pattern an service pattern as given below. He has also decided to evaluate the operations by using the simulation technique. Arrivals Services Inter-arrival time (minutes) Probability Inter-arrival time (minutes) Probability 2 0.22 4 0.28 4 0.30 6 0.40 6 0.24 8 0.22 8 0.14 10 0.10 10 0.10 Assume: (i) The clock starts at 8:00 hours (ii) Only one pump is set up. (iii) The following12 Random Numbers are to be used to depict the customer arrival pattern: 78, 26, 94, 08, 46, 63, 18, 35, 59, 12, 97 and 82. 92 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (iv) The following 12 Random Numbers are to be used to depict the service pattern: 44, 21, 73, 96, 63, 35, 57, 31, 84, 24, 05, 37 You are required to ind out the (i) probability of the pump being idle, and (ii) Average time spent by a customer waiting in queue. solution: Inter-arrival time service time Minutes probability cumulative probability Range Minutes probability cumulative probability Range 2 .22 .22 00-21 4 .28 .28 00-27 4 .30 .52 22-51 6 .40 .68 28-67 6 .24 .76 52-75 8 .22 .90 68-89 8 .14 .90 76-89 10 .10 1.00 90-99 sl. No. Random No. for inter arrival Inter arrival time Entry time in queue service start time Random no for service. service time service end time Waiting time of customer Idle time 1 78 8 8.08 8.08 44 6 8.14 - 8 2 26 4 8.12 8.14 21 4 8.18 2 - 3 94 10 8.22 8.22 73 8 8.30 - 4 4 08 2 8.24 8.30 96 10 8.40 6 - 5 46 4 8.28 8.40 63 6 8.46 12 - 6 63 6 8.34 8.46 35 6 8.52 12 - 7 18 2 8.36 8.52 57 6 8.58 16 - 8 35 4 8.40 8.58 31 6 9.04 18 - 9 59 6 8.46 9.04 84 8 9.12 18 - 10 12 2 8.48 9.12 24 4 9.16 34 - 11 97 10 8.58 9.16 05 4 9.20 18 - 12 82 8 9.06 9.20 37 6 9.26 14 - 140 12 Total Time Average waiting time spent by the customer = 140/12 = 11.67 minutes probability of idle time of petrol station = 12/86 = 0.1395 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 93 Production Planning and Control Illustration 19. A retailer deals in a perishable commodity. The daily demand and supply are variables. The data for the past 500 days show the following demand and supply: Availability (kg.) supply (No. of days) Demand (kg.) Demand (No. of days) 10 40 10 50 20 50 20 110 30 190 30 200 40 150 40 100 50 70 50 40 The retailer buys the commodity at ` 20 per kg. and sells at ` 30 per kg. Any commodity remains at the end of the day, has no sales value. Moreover the loss on unsatisied demand is ` 8 per Kg. Given the following pair of random numbers, simulate 6 days sales, demand and proit: (31, 18) (63, 84) (15, 79) (07, 32) (43, 75) (81, 27). The irst random number in the pair is that of supply and the second random number is for demand. Answer: Probability Distribution (Supply) Supply Probability Cum. Prob. Range Range for simulation 10 40/500 = 0.08 0.08 0 - 0.08 0 - 0.07 20 50/500 = 0.10 0.18 0.08 - 0.18 0.08 - 0.17 30 190/500 = 0.38 0.56 0.18 - 0.56 0.18 - 0.55 40 150/500 = 0.30 0.86 0.56 - 0.86 0.56 - 0.85 50 70/500 = 0.14 1.00 0.86 - 1.00 0.86 - 0.99 Probability distribution (Demand) Demand Probability Cum. Prob. Range Range for simulation 10 50/500 = 0.10 0.10 0 - 0.10 0 - 0.09 20 110/500 = 0.22 0.32 0.10 – 0.32 0.10 – 0.31 30 200/500 = 0.40 0.72 0.32 - 0.72 0.32 – 0.71 40 100/500 = 0.20 0.92 0.72 – 0.92 0.72 – 0.91 50 40/500 = 0.08 1.00 0.92 – 1.00 0.92 – 0.99 Statement Showing Supply, Demand and Proit 94 Loss on unsatisied demand (III) Proit/Loss I-II-III - Nil 800 - 400 400 160 40 300 200 160 -60 40 900 600 80 220 20 600 800 - -200 Day Supply Demand Sale (I) Cost (II) 1 30 20 600 600 2 40 40 1,200 3 20 40 600 4 10 30 5 30 6 40 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 4.7 lINE bAlANcINg Line balancing is arranging a production line so that there is an even low of production from one work station to the next, i.e. so that there are no delays at any work station that will leave the next work station with idle time. Line balancing is also deined as “the apportionment of sequential work activities into work stations in order to gain a high utilization of labour and equipment and therefore minimize idle time.” Balancing may be achieved by rearrangement of the work stations or by adding machines and / or workers at some of the stations so that all operations take about the same amount of time. line balancing procedure in Assembly layouts Step 1 : Determine what tasks must be performed to complete one unit of a inished product and the sequence in which the tasks must be performed. Draw the precedence diagram. Sfep 2 : Estimate the task time (amount of time it takes a worker to perform each task). Step 3; Determine the cycle time (the amount of time that would elapse between products coming off the end of the assembly line if the desired hourly production were being produced.) Sfep 4 : Assign each task to a worker and balance the assembly line. This process results in determining the scope of each worker’s job or which tasks that he or she will perform. steps Involved in combining of the Tasks into Worker’s Jobs 1. Starting at the beginning of the precedence diagram, combine tasks into a work station in the order of the sequence of tasks so that the combined task times approach but do not exceed the cycle time or multiples of the cycle time. 2. When tasks are combined into a workstation, the number of multiples of the cycle time is the number of workers required at the work station, all performing the same job. Analysis of line balancing problems The procedure involves the following steps 1. Determine the no. of work stations and time available at each work station. 2. Group the individual tasks into amounts of work at each work station. 3. Evaluate the eficiency of grouping When the available work time at any station exceeds that which can be done by one worker, additional workers must be added at that work station. The key to eficient line balancing is to group activities or tasks in such a way that the work times at the work station are at or slightly less than the cycle time or a multiple of cycle time if more than one worker is required in any workstation. Determination of cycle time (cT) : When the amount of output units required per period (period may be hour, shift, day or week etc.) is speciied and the available time per period is given (i.e., the number of working hours per shift, number of shifts per day, number of working days per week etc.) then, Cycle time (CT) = Available time per period Output units required per period Cycle time is the time interval at which completed products leave the production line. Determination of the Ideal or Theoretical Minimum Number of Workers Required in the line ( )( Total operation × Output units Ideal or theoretical or task time required per period minimum no. of workers  = required in the assy. Available time per period per worker line/production line  N= ) ∑ t ×  CT  = ∑ CT  1  t OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 95 Production Planning and Control Balancing Eficiency : An eficient line balancing will minimize the amount of idle time. The balance eficiency can be calculated as: (i) Output of task time ∑t = Input by workstation times CT × N EffB = Where, ∑t = Sum of the actual worker times or task times to complete one unit CT = Cycle time ; (ii) N = No. workers or work stations Theoretical minimum number fo workers Actual number of workers EffB = The grouping of tasks is done with the aid of a precedence diagram. The precedence diagram is divided into work zones or stations and the appropriate activities are granted under each workstation until the cycle time is as fully utilized as possible. Terminology used in line balancing (i) Tasks : Element of work or activity (ii) Task precedence : Indicates the sequence in which tasks must be performed. Except the beginning task, all other tasks have preceding tasks. (iii) Task times : The amount of time required for an automatic machine or a well trained worker to perform a task. (iv) Cycle time : The interval of time between two successive products coming off the end of a production line or assembly line. (v) Productive time per hour : The duration (in minutes) a work station or machine is working in each-hour. The productive time per hour is lesser than the actual available time (one hour) due to lunch break, breakdown, personal time for the worker, start-ups and shutdowns. (vi) Work station : Physical location where a particular set of tasks is performed. Workstation could be either a machine or equipment operated by a worker or an automatic machine or a machine operated by a robot. (vii) Work centre : A physical location where two or more identical workstations are located in order to provide the needed production capacity. (viii) Theoretical minimum number of workstations : The least number of work stations that can provide the required production calculated by : Nt = Cycle time = Sum of all task time (∑ t) Cycle time (CT) Available time Output required (ix) Actual number of workstations: The total number of workstations required on the entire production line, calculated as the next higher integer value of the number of workstations working. (x) Utilisation : The percentage of time that a production line is working. This is calculated as Utilisation or Balance eficiency = Minimum no. of workstations ∑t × 100 = Actual no. of workstations CT × N line balancing procedure steps : 1. Calculate the cycle time and determine the theoretical minimum number of workstations Nt = ∑ t = Sum of all task time CT Cycle time (CT) = 96 Cycle time Available time Output required OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 2. Compute the actual number of workstation (N) required by rounding up the theoretical number of workstations to the next higher integer value. 3. Assign the tasks to the workstations beginning with station 1. Tasks are assigned to work stations moving from left to right through the precedence diagram. 4. Before assigning each task to a workstation, use the following criteria to determine which tasks are eligibly to be assigned to a workstation (a) All preceding tasks in the sequence have been assigned already. (b) The task time does not exceed the time remaining at the workstation. If no tasks are eligible to be assigned to a particular workstation, move to the next workstation. 5. After each task assignment, determine the time remaining at the current work station by subtracting the sum of times for tasks already assigned to the work station from the cycle time. 6. When there is a tie between two tasks (parallel tasks) to be assigned, use one- of these rules : (a) Assign the, task with the longest task time (b) Assign the task with greatest number of followers. If there is still a tie, choose one task arbitrarily, 7. Continue assignment of tasks until all tasks have been assigned to workstations. 8. Calculate the idle time (or balance delay), percent idle time and eficiency of balancing the line. Illustration 20: Table shows the time remaining (number of days until due date) and the work remaining (number of day’s work) for 5 jobs which were assigned the letters A to E as they arrived to the shop. Sequence these jobs by priority rules viz., (a) FCFS, (b) EDD, (c) LS, (d) SPT and (e) LPT. Job Number days until due date Number of day’s work remaining A 8 7 B 3 4 C 7 5 D 9 2 E 6 6 solution : (a) FCFS (First come irst served) : Since the jobs are assigned letters A to E as they arrived to the shop, the sequence according to FCFS priority rule is A B C D E (b) EDD (Early due date job irst) rule : Taking into account the number of days until due date, the sequence of jobs as per EDD rules is B E C A D (3) (c) (6) (7) (8) (9) L.S. (Least slack) rule also called as Minimum slack rule. Calculation of slack : Slack = (Number of days until due date ) - (Number of days work remaining) OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 97 Production Planning and Control Job slack A 8-7 =1 B 3-4 = (-1) C 7-5 = 2 D 9-2 =7 E 6-6 =0 Sequence : (d) (Days) B E -1 0 A 1 C D 2 7 SPT (Shortest Processing Time job irst) also referred as SOT (Shortest Operation time job First) rule or MINPRT (Minimum Processing time job irst) rule. Sequence : D B C E A 2 4 5 6 7 (e) LPT (Longest Processing time job irst) also referred to as LOT (Longest operation time job irst ) rule. Sequence : A E C B D 7 6 5 4 2 Illustration 21: The following jobs have to be shipped a week from now (weak has 5 working days) Job A B C D E F Number of day’s work remaining 2 4 7 6 5 3 Sequence the jobs according to priority established by (a) least slack rule (b) critical ratio rule. solution : (a) Calculation of slack : Number of days until clue date is 5 days for all jobs Job 98 slack (days) A 5 - 2 =3 B 5 - 4 = 1 C 5 - 7 = (-2) D 5 - 6 = (-1) E 5 - 5 =0 F 5 - 3 =2 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Sequence : C D E B F A -2 -1 0 1 2 3 (b) Calculation of Critical ratio : Critical ratio = Due Date-Date Now DD − DN Available time = = Lead Time Remaining LTR Operation time Critical ratio for job A = 5/2 = 2.5 Critical ratio for job B = 5/4 = 1.25 Critical ratio for Job C = 5/7 = 0.71 Critical ratio for job D = 5/6 = 0.83 Critical ratio for job E = 5/5 = 1.0 Critical ratio for job F = 5/3 = 1.67 Job having least critical ratio is given the irst priority and so on. Sequence : Critical Ratio : C D 0.71 E 0.83 1.0 B 1.25 F 1.67 A 2.5 Illustration 22: In a factory, there are six jobs to perform, each of which should go through two machines A and B, in the order AB. The processing timings (in hours) for the jobs are given here. You are required to determine the sequence for performing the jobs that would minimise the total elapsed time, T. What is the value of T? Job Machine A Machine b 1 7 3 2 4 8 3 2 6 4 5 6 5 9 4 6 8 1 solution: (a) The least of all the times given in the table is for job 6 on machine B. So, perform job 6 in the end. It is last in the sequence. Now delete this job from the given data. (b) Of all timings now, the minimum is for job 3 on machine A. So, do the job 3 irst. (c) After deleting job 3 also, the smallest time of 3 hours is for job 1 on machine B. Thus, perform job 1 in the end (before job 6). (d) Having assigned job 1, we observe that the smallest value of 4 hours is shared by job 2 on machine A and job 5 on machine B. So, perform job 2 irst and job 5 in the end. (e) Now, the only job remaining is job 4, it shall be assigned the only place left in the sequence. The resultant sequence of jobs is, therefore, as follows: 3 2 4 5 1 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 6 99 Production Planning and Control This sequence is the optimal one. The total elapsed time, T, is obtained in Table 2.8.16 as equal to 36 hours Table: calculation of Total Elapsed Time (T) Job Machine A Machine b In Out In Out 3 0 2 2 8 2 2 6 8 16 4 6 11 16 22 5 11 20 22 26 1 20 27 27 30 6 27 35 35 36 As shown in this table, the irst job, job 3, starts at lime 0 on the machine A and is over by time 2, when it passes to machine B to be worked on till time 8. The job 2 starts on the machine A at time 2 as the machine is free at that lime. It is completed at time 6 and has to wait for 2 hours before it is processed on machine B, starting at time 8 when this machine is free, Similarly, the various jobs are assigned to the two machines and the in and out times are obtained. 4.8 lEAN opERATIoNs Lean operation has its roots in the Toyota Automobile Co., of Japan, where waste was to be avoided at all costs: (i) the waste in time caused by having to repair faulty products (ii) the waste of investment in keeping high inventories and (iii) the waste of having idle workers. The elements of lean production are: (i) To consider the organisation in terms of supply chain of value streams that extends from suppliers of raw materials, through transformation to the inal customer. (ii) To organise workers in teams and to have every one in the organisation conscious of his or her work. (iii) To produce products of perfect quality and to have continuous quality improvement as a goal. (iv) To organise the operation by product or cellular manufacturing, rather than using a functional or process layout. (v) To operate the facility in a just-in-time mode. 4.9 JusT-IN-TIME (JIT) objectives of JIT manufacturing : The speciic goal of JIT manufacturing is to provide /the right quality level at the right place. Customer demand always determines what is right. JIT tries to build only what internal and external customers want and when they want it. The more focussed objectives of JIT are: (i) Produce only the products (goods or services) that customers want. (ii) Produce products only as quickly as customers want to use them. (iii) Produce products with perfect quality. (iv) Produce in the minimum possible lead times. (v) Produce products with features that customers want and no others. (vi) Produce with no waste of labour, materials or equipment, designate a purpose for every movement to leave zero idle inventory. (vii) Produce with methods that reinforce the occupational development of workers. 100 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT overview of JIT manufacturing JIT manufacturing includes many activities : (i) Inventory reduction : JIT is a system for reducing inventory levels at all stages of production viz. raw materials, work-in-progress and inished goods. (ii) Quality improvement : JIT provides a procedure for improving quality both within the irm and outside the irm. (iii) lead time reduction : With JIT, lead time components such as set-up and move times are signiicantly reduced. (iv) Vendor control/performance improvement : JIT gives the buying organisation greater power in buyer-supplier relationship. The irm moves from a situation where multiple suppliers are used to a situation where only one or two suppliers are used for supplying most parts. With fewer suppliers, the buying organisation has more power because it is making larger purchases from each vendor. Also, the buying organisation can now impose higher requirements on each supplier in terms of delivery and quality. (v) continuous Improvement : In the JIT system, existing problems are corrected and new problems identiied in a never-ending approach to operations management. (vi) Total preventive Maintenance : JIT emphasises preventive maintenance to reduce the risk of equipment break-downs which may cause production hold ups and increase in manufacturing cycle time due to delays. (vii) strategic gain : JIT provides the irm’s management with a means of developing, implementing and maintaining a sustainable competitive advantage in the market place. 4.10 TRANspoRTATIoN MoDEl Introduction The basic transportation problem was originally developed by F.L. Hitchcock (1941) in his study entitled “the distribution of a product from several sources to numerous locations”. In 1947, T.C. Koopmans independently published a study on “optimum utilization of the transportation system”. Transportation models deals with the transportation of a product manufactured at different plants or factories (supply origins) to a number of different warehouses (demand destinations). The objective is to satisfy the destination requirements within the plants capacity constraints at the minimum transportation cost. Transportation models thus typically arise in situations involving physical movement of goods from plants to warehouses, warehouses to wholesalers, wholesalers to retailers and retailers to customers. Solution of the transportation models requires the determination of how many units should be transported from each supply origin to each demands destination in order to satisfy all the destination demands while minimizing the total associated cost of transportation. Feasible solution: A set of non-negative values xij, i=1, 2, ……, m; j = 1, 2, …., n that satisies no. of rows to no. of columns is called a feasible solution to the transportation problem. basic Feasible solution: An initial feasible solution with an allocation of (m + n – 1) number of variables, xij, i=1, 2, ……, m; j = 1, 2, …., n, is called a basic feasible solution. optimum solution: A feasible solution (not necessarily basic) is said to be optimum if it minimizes the total transportation cost. balanced or unbalanced Transportation problems: A transportation problem can be balanced or unbalanced. It is said to be balanced if the total demand of all the warehouses equals the amount produced in all the factories. If in reality, capacity is greater than requirement, then a dummy warehouse may be used to create desired equality. If capacity is less than requirement, then a dummy factory may be introduced. The transportation cost in both the dummy cases is assumed to be zero. Where the number of rows and columns are not equal, it is called unbalanced transportation problem. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 101 Production Planning and Control loops in Transportation Table: In a transportation table, an ordered set of four or more cells is said to form a loop if any two adjacent cells in the ordered set lie either in the same row or in the same column. Moreover every loop has an even number of cells. It may be noted that a feasible solution to a T.P is basic if and only if the corresponding cells in the transportation table do not contain a loop. Degeneracy of a Transportation problem: When the quantities are allocated to cost cells within the matrix and if such allocations are less than m + n -1 allocations (where ‘m’ stands for no. of rows and ‘n’ stands for no. of columns), such a situation is said to be Degeneracy of a Transportation Problem. METHoDs oF solVINg TRANspoRTATIoN pRoblEM: The following are the methods of solving transportation problem: 1. The north-west corner rule 2. Lowest cost entry method 3. Vogel’s approximation method 1. North West corner Method (NWcM): The simplest of the procedures used to generate an initial feasible solution is NWCM. It is so called because we begin with the north west or upper left corner cell of our transportation table. Various steps of this method can be summarized as under: step 1: Select the north west (upper left-hand) corner cell of the transportation table and allocate as many units as possible equal to the minimum between available supply and demand requirement, i.e., min (s1, d1). step 2: Adjust the supply and demand numbers in the respective rows and columns allocation. step 3: (a) If the supply for the irst row is exhausted, then move down to the irst cell in the second row and irst column and go to step 2. (b) If the demand for the irst column is satisied, then move horizontally to the next cell in the second column and irst row and go to step 2. step 4: If for any cell, supply equals demand, then the next allocation can be made in cell either in the next row or column. step 5: Continue the procedure until the total available quantity is fully allocated to the cells required. 2. least cost Method (lcM): The allocation according to this method is very useful as it takes into consideration the lowest cost and therefore, reduces the computation as well as the amount of time necessary to arrive at the optimum solution. Various steps of this method can be summarized as under: step 1: (a) Select the cell with the lowest transportation cost among all the rows or columns of the transportation table. (b) If the minimum cost is not unique, then select arbitrarily any cell with this minimum cost. 102 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT step 2: Allocate as many units as possible to the cell determined in step 1 and eliminate that row (column) in which either supply is exhausted or demand is satisied. step 3: Repeat steps 1 and 2 for the reduced table until the entire supply at different factories is exhausted to satisfy the demand at different warehouses. 3. Vogel’s Approximation Method (VAM): This method is preferred over the other two methods because the initial basic feasible solution obtained is either optimum or very close to the optimum solution. Therefore, the amount of time required to arrive at the optimum solution is greatly reduced. Various steps of this method are summarized as under: step 1: Compute a penalty for each row and column in the transportation table. The penalty for a given row and column is merely the difference between the smallest cost and the next smallest cost in that particular row or column. step 2: Identify the row or column with the largest penalty. In this identiied row or column, choose the cell which has the smallest cost and allocate the maximum possible quantity to the lowest cost cell in that row or column so as to exhaust either the supply at a particular source or satisfy demand at a warehouse. If a tie occurs in the penalties, select that row/column which has minimum cost. If there is a tie in the minimum cost also, select that row/column which will have maximum possible assignments. It will considerably reduce computational work. step 3: Reduce the row supply or the column demand by the amount assigned to the cell. step 4: If the row supply is now zero, eliminate the row, if the column demand is now zero, eliminate the column, if both the row supply and the column demand are zero, eliminate both the row and column. step 5: Recompute the row and column difference for the reduced transportation table, omitting rows or columns crossed out in the preceding step. step 6: Repeat the above procedure until the entire supply at factories are exhausted to satisfy demand at different warehouses. Illustration 23: The cost conscious company requires for the next month 300, 260 and 180 tonnes of stone chips for its three constructions C1, C2 and C3 respectively. Stone chips are produced by the company at three mineral ields taken on short lease by the company. All the available boulders must be crushed into chips. Any excess chips over the demands at sites C1, C2 and C3 will be sold ex-ields. The ields are M1, M2 and M3 which will yield 250, 320 and 280 tones of stone chips respectively. Transportation costs from mineral ields to construction sites vary according to distances, which are given below in monetary unit (MU). From To C1 C2 C3 M1 8 7 6 M2 5 4 9 M3 7 5 5 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 103 Production Planning and Control (i) Determine the optimal economic transportation plan for the company and the overall transportation cost in MU. (ii) What are the quantities to be sold from M1, M2 and M3 respectively? solution: Hence There are m + n – 1 allocations. Hence Optimality test is to be performed. Since Δ ij ≥ 0 Solution is optimum. Qty M1 M2 M3 140 x 6 = 840 C4 110 x 0 = 0 C1 300 x 5 = 1500 C2 20 x 4 = 80 C2 240 x 5 = 1200 C3 40 x 5 = 200 850 104 Minimum Cost C3 ` 3820 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Illustration 24: Ladies fashion shop wishes to purchase the following quantity of summer dresses: Dress size I II III IV Quantity 100 200 450 150 Three manufacturers are willing to supply dresses. The quantities given below are the maximum that they are able to supply of any given combination of orders for dresses: Manufacturers A B C Total quantity 150 450 250 The shop expects the proit per dress to vary with the manufacturer as given below: size I II III IV A `2.5 `4.0 `5.0 `2.0 B `3.0 `3.5 `5.5 `1.5 C `2.0 `4.5 `4.5 `2.5 Required: (a) Use the transportation technique to solve the problem of how the orders should be placed with the manufacturers by the fashion shop is order to maximise proit. (b) Explain how you know there is no further improvement possible. solution: Proit Matrix OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 105 Production Planning and Control Proit Matrix is converted into Loss Matrix. There are 1 less than m + n – 1 allocations. Hence € (Epsilon) is introduced in least cost unallocated cell. Since ∆ij is > 0, the solution is optimum 106 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Qty I A —— IV —— Maximum Proit 100 x 2.5 = 50 x 2 250 = 100 450 x 5.5 = 2475 —— 200 x 4.5 = 900 B III —— C II C IV —— 50 x 2.5 = Dummy IV —— 50 x 0 125 = 0 900 ` 3850 Illustration 25: The products of three plants F1, F2 and F3 are to be transported to 5 warehouses W1, W2, W3, W4 and W5. The capacities of plants, demand of warehouses and the cost of transportation from one plant to various warehouses are indicated in the following table: W1 W2 W3 W4 W5 F1 74 56 54 62 68 400 F2 58 64 62 58 54 500 F3 66 70 52 60 60 600 200 280 240 360 320 1500/1400 Warehouse Demand plant capacity Find out a distribution plan of products from plants to the warehouses at a minimum cost. What is the minimum cost? (b) Is there any surplus capacity of the plants? If so, in which plant should we associate that surplus capacity? (c) Is there any alternate solution for the optimum solution achieved in solution: 74 56 54 64 62 280 58 62 68 400/300/20/0 54/2/6/6/6/6 58 54 0 500/300/0 *54/4/4/4/4 60 0 600/360/340/0 52/8/0/0/0/6 20 100 200 300 66 70 52 60 240 340 20 200 280 240 360 320 0 0 0 340 20 0 0 8 8 2 2 6 8 8 2 8 *8 8* 0 2 6 2 6 2 6 2 6* 100 0 0 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 107 Production Planning and Control 2 8* Since m + n – 1 allocation, optimality test can be performed. Since ∆ij is > 0, the solution is optimal. Qty F1 W2 —— 280 x 56 = 15680 W4 —— 20 x 62 = 1240 100 x 0 = 0 Dummy F2 F3 Minimum cost W1 —— 200 x 58 = 11600 W5 —— 300 x 54 = 16200 W3 —— 240 x 52 = 12480 W4 —— 340 x 60 = 20400 W5 —— 20 x 60 = 1200 1500 ` 78800 Alternative solution: 108 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT F1 W2 W4 280 x 56 = 20 x 54 = 15680 1080 Dummy100 x 0 = F2 F3 0 W1 200 x 58 = 11600 W5 300 x 54 = 16200 W3 220 x 52 = 11440 W4 360 x 60 = 21600 W5 20 x 60 = 1200 1500 ` 78800 Illustration 26: A manufacturer has distribution centres X, Y, and Z. These centres have 40,20 and 40 units of his product. His retail outlets at A, B, C, D and E require 25,10,20,30 and 15 units respectively. The transport cost in (Rupees/Unit) between each centre and each outlet is given in the following table: Distribution Centre Retail outlets A B C D E X 55 30 40 50 40 Y 35 30 100 45 60 Z 40 60 95 35 30 We have to ind out the optimum distribution cost. solution: OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 109 Production Planning and Control 110 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Qty X Minimum Cost B —— 10 x 30 = 300 C —— 20 x 40 = 800 E —— 10 x 40 = 400 Y A —— 20 x 35 = 700 Z A —— 5 x 40 = 200 D —— 30 x 35 = E —— 5 x 30 = 1050 150 100 ` 3600 Illustration 27: Priyanshu enterprise has three factories at locations A, B and C which supply three warehouses located at D,E and F. Monthly factory capacities are 10,80 and 15 units respectively. Monthly warehouse requirements are 75,20 and 50 units respectively. Unit shipping costs (in Rs.) are given in the following table: From To D E F A 5 1 7 B 6 4 6 C 3 2 5 The penalty costs for not satisfying demand at the warehouses D, E and F are ` 5, ` 3 and ` 2 per unit respectively. Determine the optimum distribution for Priyanshu, using any of the known algorithms. solution: D E 5 A B C F 1 10 7 200 6 4 60 10 6 10 3 2 5 15 5 Dummy D 3 2 40 75 20 50 60 10 10 0 0 0 2 1 3 2 1 3* 3* 2 1 10/0 4* 80/0 2/2/2 15/0 1/1/1 40/0 1/1 Since there are m+n-1 allocations optimality test can be performed. Since ∆ ij ≥ 0, the solution is optimum. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 111 Production Planning and Control 5 3 10 6 10 3 60 1 4 2 1 3 3 40 5 3 6 4 0 0 5 2 2 -3 -4 6 Quantity Minimum Cost E 10 x 1 10 D 60 x 6 360 E 10 x 4 40 F 10 x 6 60 D 15 x 3 45 F 40 x 2 80 A B C U 10 15 V 7 4 6 Dummy 145 ` 595 (including Penalty cost of ` 80) Illustration 28: The products of two plants A and B are to be transported to 3 warehouses W1, W2 and W3. The cost of transportation of each unit from plants to the warehouses are indicated below: Warehouses Plants (W1) (W2) (W3) Capacities A 25 17 25 300 B 15 10 18 500 300 300 500 800/1100 Demand Find the optimum distribution and the optimum cost. 112 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT solution: W1 25 A B W2 W3 17 25 100 200 15 300 10 18 0 0 200 0 C 300 300 300 500 0 100 200 0 0 15 10 18* 10* 7 7 - 7 7 300/0 8 8 8 500/200/0 5 5 8 300/0 0 - - There are m + n + 1 allocation optimality is to be performed. 25 17 3 100 0 18 -7 200 15 300 25 10 200 0 0 0 3 22 0 8 -25 300 17 25 As ∆ij ≥ 0, the solution is optimum. Therefore the minimum cost is as follows: A B Quantity Minimum Cost W2 100 x 17 1700 W3 200 x 25 5000 W1 300 x 15 4500 W2 200 x 10 2000 DummyW3 300 x 0 0 1100 ` 13200 optimum cost: ` 13,200 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 113 Production Planning and Control 4.11 lINEAR pRogRAMMINg TEcHNIQuE Introduction Linear Programming is an optimization technique. It is “a technique for specifying how to use limited resources or capacities of a business to obtain a particular objective, such as least cost, highest margin or least time, when those resources have alternate uses”. The situation which require a search for “best” values of the variables, subject to certain constraints, are amenable to programming analysis. These situations cannot be handled by the usual tools of calculus or marginal analysis. The calculus technique can only handle exactly equal constraints, while this limitation does not exist in case of linear programming problem. A linear programming problem has two basic parts. • The irst part is the objective function, which describes the primary purpose of the formulation – to maximize some return (for example, proit) or to minimize some cost (for example, production cost or investment cost). • The second part is the constraint set. It is the system of equalities and/or inequalities, which describes the restrictions (conditions or constraints) under which optimization is to be accomplished. Deinition of Linear Programming According to Kohlar “A method of planning and operation involved in the construction of a model of a real situation containing the following elements: (a) variables representing the available choices, and (b) mathematical expressions (i) relating the variables to the controlling conditions, and (ii) relecting the criteria to be used in measuring the beneits derivable from each of the several possible plans, and (iii) establishing the objective. The method may be so devised as to ensure the selection of the best of a large number of alternatives”. Samuelson, Dorfman and Solow deines LP as “The analysis of problems in which a linear function of a number of variables is to be maximized (or minimized) when those variables are subject to a number of restraints in the form of linear inequalities”. In the words of Loomba, “LP is only one aspect of what has been called a system approach to management wherein all programmes are designed and evaluated in terms of their ultimate affects in the realization of business objectives”. Application Areas of linear programme In practice linear programming has proved to be one of the most widely used technique of managerial decision making in business, industry and numerous other ields. 1. Industrial Applications Linear programming is extensively used to solve a variety of industrial problems. In each of these applications, the general objective is to determine a plan for production and procurement in the time period under consideration. It is necessary to satisfy all demand requirements without violating any of the constraints. Few examples of industrial applications are as follows: (a) Product Mix-Problem. (b) Production Scheduling. (c) Production Smoothing Problem. (d) Blending Problems. (e) Transportation Problems. (f) 114 Production distribution problems. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (g) Trim Loss. (h) Linear programming is also used by oil reineries to determine the optimal mix of products to be produced by the reinery during a given period. (i) Communication Industry. LP methods are used in solving problems involving facilities for transmission, switching, relaying etc. (j) Rail Road Industry: An LP model for optimal programming of railway freight, and train movements has been formulated to handle scheduling problems as found at large terminal switching rail points. 2. Management Applications: (a) Portfolio Selection. (b) Financial Mix Strategy. (c) Proit Planning. (d) Media Selection. (e) Travelling Salesmen Problem. (f) Determination of equitable salaries. (g) Stafing problem. 3. Miscellaneous Applications: The additional application of Linear Programming are as follows: (a) Form planning. - The particular crops to be grown or cattle to keep during a period - The acreage to be devoted to each, and - The particular production methods to be used. (b) Airline routine. (c) Administration, Education and Politics have also employed linear programming to solve their problems. (d) Diet Problems. The diet problem, one of the earliest applications of linear programming was originally used by hospitals to determine the most economical diet for patients. 4. Administrative applications of linear programming: Linear programming can be used for administrative applications. Administrative applications of Linear Programming are concerned with optimal usage of resources like men, machine and material. 5. Non-Industrial applications of linear programming: Linear programming techniques/tools can be applied in the case of non-industrial applications as well. Examples of the use of L.P techniques for non-industrial applications are given below: • Agriculture. • Environmental Protection. • Urban Department. • Facilities Location. 6. Further applications of linear programming are: • In structural design for maximum product. • In balancing assembly lines. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 115 Production Planning and Control • In scheduling of a military tanker leet. • In determining which parts to make and which to buy to obtain maximum proit margin. • In selecting equipment and evaluating methods improvements that maximize proit margin. • In planning most proitable match of sales requirements to plant capacity that obtains a fair share of the market. • In design of optimal purchasing policies. FoRMulATIoN oF lINEAR pRogRAMMINg pRoblEM: The formulation of linear programming problem as a mathematical model involves the following basic steps: step 1: Find the key-decision to be made from the study of the solution. (In this connection, looking for variables helps considerably). step 2: Identify the variables and assume symbols x1, x2 …… for variable quantities noticed in step 1. step 3: Express the possible alternatives mathematically in terms of variables. The set of feasible alternatives generally in the given situation is: [(x1, x2); x1 > 0, x2 > 0] step 4: Mention the objective quantitatively and express it as a linear function of variables. step 5: Express the constraints also as linear equalities/inequalities in terms of variables. soME DEFINITIoNs: (a) solution: Values of decision variables xj (j = 1, 2 ….., n) which satisfy the constraints of a general L.P.P., is called the solution to that L.P.P. (b) Feasible solution: Any solution that also satisies the non-negative restrictions of the general L.P.P., is called a feasible solution. (c) basic solution: For a set of m simultaneous equations in n unknowns (n>m), a solution obtained by setting (n-m) of the variables equal to zero and solving the remaining m equations in m unknowns is called a basic solution. Zero variables (n-m) are called non basic variables and remaining m are called basic variables and constitute a basic solution. (d) basic Feasible solution: A feasible solution to a general L.P. problem which is also basic solution is called a basic feasible solution. (e) optimal Feasible solution: Any basic feasible solution which optimize (maximize or minimize) the objective function of a general L.P.P. is called an optimal feasible solution to that L.P. problem. (f) Degenerate solution: A basic solution to the system of equations is called degenerate if one or more of the basic variables become equal to zero. 116 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT limitations of linear programming: Although linear programming is a very useful technique for solving optimization problems, there are certain important limitations in the application of linear programming. Some of these are discussed below: 1. Firstly, the linear programming models can be applied only in those situations where the constraints and the objective function can be stated in terms of linear expressions. 2. In linear programming problems, coeficients in the objective function and the constraint equations must be completely known and they should not change during the period of study. 3. Yet another important limitation of linear programming is that it may give fractional valued answers. 4. Linear programming will fail to give a solution if management have conlicting multiple goals. 5. Linear programming problem requires that the total measure of effectiveness and total resource usage resulting from the joint performance of the activities must equal the respective sums of these quantities resulting from each activity being performed individually. 6. Many real-world problems are so complex, in terms of the number of variables and relationships constrained in them, that they tax the capacity of even the largest computer. 7. Other limitations of LP includes:- Does not take into consideration the effect of time and uncertainty. - Parameters appearing in the model are assumed to be constants but in real-life situations they are frequently neither known nor constants. Illustration 29: A Chemical Company produces two compounds A and B. The following table gives the units of ingredients C and D per kg of compounds A and B as well as minimum requirements of C and D and costs/kg of A and B. Using the simplex method, ind the quantities of A and B which would give a supply of C and D at a minimum cost. Table Compound Ingredient Minimum requirement A B C 1 2 80 D 3 1 75 4 6 Cost per kg. solution: Let x1 be the no. of units of A Let x2 be the no. of units of B Objective function: Min.Z = 4x1 + 6x2 Subject to Constraints: x1+2x2 ≥ 80 3x1+x2 ≥ 75 And x1, x2≥ 0 x1+2x2-x3+A1 = 80 3x1+x2-x4+A2 = 75 Max. Z = 4x1+6x2-0.x3-0.x4-M.A1- M.A2 x1, x2, x3, x4, A1, A2 ≥ 0. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 117 Production Planning and Control Illustration 30: A pension fund manager is considering investing in two shares A and B. It is estimated that: (i) Share A will earn a dividend of 12% per annum and share B 4% per annum. (ii) Growth in the market value in one year of share A will be 10 paise per Rs.1 invested and in B 40 paise per Rs.1 invested. He requires investing the minimum total sum which will give: Dividend income of at least `600 per annum and growth in one year of at least `1,000 on the initial investment. you are required to: (i) State the mathematical formulation of the problem (ii) Compute the minimum sum to be invested to meet the manager’s objective by using the simplex method. solution: Shares Dividend Growth in ` A 12% 10/100 = 0.1 B 4% 41/100 = 0.4 Min-income 600 1000 Let x1 be the amount invested on share A Let x2 be the amount invested on share B Objective function: Min. Z = x1+x2 subject to constraints: 0.12 x1 + 0.04 x2 ≥ 600 0.1 x1 + 0.4 x2 ≥ 1000 And x1, x2 ≥ 0. Illustration 31: A company possesses two manufacturing plants each of which can produce three products x, Y and Z from a common raw material. However, the proportions in which the products are produced are different in each plant and so are the plant’s operating costs per hour. Data on production per hour costs are given below, together with current orders in hand for each product. Operating cost/ hour in ` Product X y Z Plant A 2 4 3 9 Plant B 4 3 2 10 Orders on hand 50 24 60 You are required to use the simplex method to ind the number of production hours needed to fulill the orders on hand at minimum cost. Interpret the main features of the inal solution. 118 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT solution: Let α be no. of hours of plant A in use Let β be no. of hours of plant B in use objective function: Min Z = 9α + 10β subject to constraints: 2α + 4β ≥ 50 4α + 3β ≥ 24 3α + 2β ≥ 60 And α, β ≥ 0 Illustration 32: The products P, Q and R are being produced in a plant having proit margin as ` 3, ` 5 and ` 4 respectively. The raw materials A, B and C are of scarce supply and the availability is limited to 8, 15 and 10 units respectively. Speciic consumption is indicated in the table below: P Q R Available units A 2 3 - 8 B 3 2 4 15 C - 2 5 10 3/- 5/- 4/- Write down the problem mathematically for maximization of proit margin. solution: Let x1 be the no. of units of product P Let x2 be the no. of units of product Q Let x3 be the no. of units of product R Objective function: Max. Z = 3x1+5x2 + 4x3 Subject to constraints: 2x1+3x2 ≤ 8 3x1+2x2 + 4x3 ≤ 15 2x2+5x3 ≤ 10 And x1, x2, x3 ≥ 0 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 119 Production Planning and Control Illustration 33: A Bank is in the process of formulating its loan policy. Involving a maximum of Rs.600 Million. Table below gives the relevant types of loans. Bad debts are not recoverable and produce no interest receive. To meet competition from other Banks the following policy guidelines have been set. At least 40% of the funds must be allocated to the agricultural and commercial loans. Funds allocated to housing must be at least 50% of all loans given to personal, car, Housing. The overall bad debts on all loans may not exceed 0.06. Formulate a linear program Model to determine optimal loan allocations. Type of loan Interest rate % bad debts (probability) Personal 17 0.10 Car 14 0.07 Housing 11 0.05 Agricultural 10 0.08 Commercial 13 0.06 solution: Let x1 be the amount allocated for personal loan Let x2 be the amount allocated for car loan Let x3 be the amount allocated for Housing loan Let x4 be the amount allocated for agricultural loan Let x5 be the amount allocated for Commercial loan Objective Function: Max Z = 0.17x1+0.14x2+0.11x3+0.1x4+0.13x5 – (0.10x1+0.07x2+0.05x3+0.08x4+0.06x5) = (0.17-0.10) x1+ (0.14-0.07) x2 + (0.11 -0.05) x3 + (0.10 - 0.08) x4+(0.13 – 0.06) x5 = 0.17x1+ 0.07x2 + 0.06x3 + 0.02x4+ 0.07 x5 subject to constraints (i) x1+ x2+ x3+ x4 + x5 ≤ 600 Millions (ii) x4 + x5 ≥ 0.4 (x1+ x2+ x3+ x4 + x5) (iii) x3 ≥ 0.5 (x1+ x2+ x3) (iv) 0.1x1 + 0.07x2+0.05x3+0.08x40.06 ≥ 20,000. MoRE EXAMplEs: Illustration 34. The annual hand-made furniture show and sales occurs next month and the school of vocational studies is planning to make furniture for the sale. There are three wood working classes – I year, II year, III year at the school and they have decided to make three styles of chairs A, B and C. Each chair must receive work in each class and the time in hours for each chair in each class is given. 120 Chair I year II year III year A 2 4 3 B 3 3 2 C 2 1 4 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT In the next month there will be 120 hours available in irst year class, 160 hours in the second year class and 100 hours in their year class to produce chairs. The teacher of the wood working class feels that a maximum of 40 chairs can be sold at the show. The teacher has determined that the proit from each type of chair will be A – `40, B – `35 and C – `30. Formulate a linear programming model to determine how many chairs should be produced to maximize proit. Answer: Let x1 be the chairs produced of A type x2 be the chairs produced of B type x3 be the chairs produced of C type Formulation: 2x1 + 3x2 + 2x3 ≤ 120 4x1 + 3x2 + x3 ≤ 160 3x1 + 2x2 + 4x3 ≤ 100 x1, x2, x3 ≥ 0 Objective function Maximise Z = 40x1 + 35x2 + 30x3 Illustration 35. A company produces three products P, Q and R from three raw materials A, B and C. One unit of product P requires 2 units of A and 3 units of B. One unit of product Q requires 2 units of B and 5 units of C and one unit of product R requires 3 units of A, 2 units of B and 4 units of C. The company has 8 units of material A, 10 units of material B and 15 units of material C available to it. Proits per unit of products P, Q and R are Rs. 3, Rs. 5 and Rs. 4 respectively. Formulate the question mathematically to maximize the proit. Answer: DATA suMMARy cHART Decision variables Products x1 x2 x3 P Q R Units of material available: Proit per unit (`) Type of raw material 2 3 3 2 2 5 4 8 Maximum 10 maximum 15 maximum 3 5 4 x1 = number of units of Product P x2 = number of units of Product Q x3 = number of units of Product R The given Q. is formulated as the LP model as follows: Maximize Z = 3x1 + 5x3 + 4x3 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 121 Production Planning and Control Subject to the constraints : 2x1 + 3x3 ≤ 8 3x + 2x2 + 2x3 ≤ 10 5x2 + 4x3 ≤ 15 x1, x2, x3, ≥ 0 Illustration 36. A city hospital has the following minimal daily requirement for nurses: period clock time (24 hours day) Minimal Number of Nurses Required 1 6 a.m. - 10 a.m. 2 2 10 a.m. - 2 p.m. 7 3 2 p.m. - 6 p.m. 75 4 6 p.m. - 10 p.m. 8 5 10 p.m. - 2 a.m. 20 6 2 a.m. - 6 a.m. 6 Nurses report to the hospital at the beginning of each period and work for 8 consecutive hours. The hospital wants to determine the minimal number of nurses to be employed so that there will be suficient number of nurses available for each period. Formulate this as a Linear Programming question by setting up appropriate constraints and objective function. Answer: x, + x3 ≥ 15, x3+ x4 ≥ 8, x4+ x5 ≥ 20, x5 + x6 ≥ 6, and x6 + x1 ≥ 2. Since, the objective is to minimize the total number of nurses employed in the hospital, Z = x1 + x2 + x3 + x4 + x5 + x6. Obviously, we must have x1, x2, x3, x4, x5, x6 ≥ 0. Illustration 37. A marketing manager wishes to allocate his annual advertising budget of ` 20,000 in two media vehicles A and B. The unit cost of a message in media A is ` 1,000 and that of B is ` 1,500. Media A is a monthly magazine and not more than one insertion is desired in one issue. At least 5 messages should appear in media B. The expected effective audience for unit messages in the media A is 40,000 and for media B is 55,000. (i) Develop a mathematical model Answer: step 1. The appropriate mathematical formulation of the given Q. . is as follows: Maximize (total effective audience) Z = 40,000 x1 + 55,000 x2 122 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Subject to the constraints 1,000x1 + 1,500x2 ≤ 20,000 x1 ≤ 12 x1 ≥ 5 or -x2 ≤ -5 x, x1 ≥ 0 where x1 = annual number of insertions/messages for media A. x2 = annual number of insertions/ messages for media B. Illustration 38. Calculate the standard time per article produced form the following data obtained by a work sampling study: Total No. of Observations = 2,597 No. of working observations = 2,000 No. of units produced in 100 hours duration = 5,000 numbers Proportion of manual labour = ¾ Proportion of machine time = ¼ Observed rating factor = 120% Total allowances = 15% of normal time Answer: Actual working time in the duration of 100 hours = 100 × (2,000/2,597) = 77.01 hours Time taken per article = (77.01 × 60) / 5,000 = 0.924 minute Observed manual labour time per article = 0.924 × (3 / 4) = 0.693 minute Observed machine time per article = 0.924 × (1 / 4) = 0.231 minute Normal labour time per unit = Observed time / unit × Rating factor = 0.693 × 1.20 = 0.8316 minute Standard labour time per unit = 0.8316+ (15 /100) × 0.8316 = 0.9563 minute Standard time per unit of article produced = 0.9563 + 0.231 =1.19 minutes. Illustration 39. A Company produces the products P, Q and R from three raw materials A, B and C. One unit of product P requires 2 units of A and 3 units of B. A unit of product Q requires 2 units of B and 5 units of C and one unit of product R requires 3 units of A, 2 unit of B and 4 units of C. The Company has 8 units of material A, 10 units of B and 15 units of C available to it. Proits/unit of products P, Q and R are Rs.3, Rs.5 and Rs.4 respectively. (a) Formulate the problem mathematically, (b) Write the Dual problem. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 123 Production Planning and Control solution: Raw Materials P Q R A B C Available units 2 - 3 8 3 2 2 10 - 5 4 15 Proits 3/- 5/- 4/Let x1 be the no. of units of P Let x2 be the no. of units of Q Let x3 be the no. of units of R Objective function: Max. Z = 3x1+ 5x2+4x3 subject to constraints: 2x1 + 3x2 ≤ 8 3x1 + 2x2 + 2x3 ≤ 10 5x2 + 4x3 ≤ 15 And x1, x2, x3 ≥ 0. primal Max. Z = 3x1 + 5x2 + 4x3 Subject to 2x1 + 3x2 ≤ 8 3x1 + 2x2 + 2x3 ≤ 10 5x2 + 4x3 ≤ 15 And x1, x2, x3 ≥ 0 Dual Min. Z = 8y1 + 10y2 + 15y3 Subject to 2y1 + 3y2 ≥ 3 3y1 + 2y2 + 5y3 ≥ 5 2y2 + 4y3 ≥ 4 And y1, y2, y3 ≥ 0 2x1 + 3x2 + S1= 8 3x1 + 2x2 + 2x3 + S2 = 10 5x2 + 4x3 + S3 = 15 Max Z = 3x1+ 5x2+ 4x3+0.S1+ 0.S2+ 0.S3 ∴ x1 = 23/20 x2 = 19/10 x3 = 11/8 Z = 18.45 124 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Illustration 40. Four Products A,B,C and D have Rs. 5, Rs. 7, Rs. 3 and Rs. 0 proitability respectively. First type of material (limited supply of 800 kgs.) is required by A,B,C and D at 4 kgs., 3 kgs, 3 kgs., 8 kgs, and 2 kgs. Respectively per unit. Second type of material has a limited supply of 300 kgs. And is for A,B,C and D at 1 kg, 2 kgs, 0 kgs, and 1 kg per unit. Supply of the other type of materials consumed is not limited. Machine hrs. available are 500 hours and the requirements are 8,5,0 and 4 hours for A,B,C and D each per unit. Labour hours are limited to 900 hours and requirements are 3,2,1 and 5 hours for A,B,C and D respectively. How should the irm approach so as to maximize its proitability? Formulate this as a linear programming problem. You are not required to solve the LPP. solution: Let x1 be the no. of units of product A Let x2 be the no. of units of product B Let x3 be the no. of units of product C Let x4 be the no. of units of product D Objective function Maximize Z = 5x1+7x2+3x3 + 9x4 I type material A B C D 4 3 8 2 Supply in Kgs. 800 II type material 1 2 0 1 300 Machine 8 5 0 4 500 900 Labour 3 2 1 5 Proit 5 7 3 9 Subject to constraints 4x1+3x2+ 8x3+2x4 ≤ 800 x1+2x2+ 0.x3+x4 ≤ 300 8x1+5x2+ 0.x3+4x4 ≤ 500 3x1+2x2+ x3+5x4 ≤ 900 and x1, x2, x3, x4 ≥ 0. Illustration 41. Mutual Fund has cash resources of ` 200 million for investment in a diversiied portfolio. Table below shows the opportunities available, their estimated annual yields, risk factor and term period details. Formulate a Linear Program Model to ind the optimal portfolio that will maximize return, considering the following the following policy guidelines: • All the funds available may be invested • Weighted average period of at least ive years as planning horizon. • Weighted average risk factor not to exceed 0.20. • Investment in real estate and speculative stocks to be not more than 25% of the monies invested in total. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 125 Production Planning and Control Investment type Annual yield (percentage) Risk factor Term period (years) Bank deposit 9.5 0.02 6 Treasury notes 8.5 0.01 4 Corporate deposit 12.0 0.08 3 Blue-chip stock 15.0 0.25 5 Speculative stocks 32.5 0.45 3 Real estate 35.0 0.40 10 Answer: Let x1, x2, x3, x4, x5 and x6 represent the six different investment alternatives, i.e., x1 is bank deposit, x2 is treasury note. X3 corporate deposit, X4 blue chip stock, X5 speculative stock and x6 real estate. The objective is to maximize the annual yield of the investors (in number of units) given by the linear expression. Maximize Z = 9.5x1 + 8.5x2 + 12.0x3 + 15.0x4 + 32.5x5 + 35.0x6 Subject to the Constraints: x1 + x2 + x3 + x4 + x5 + x6 ≤ 1 (Investment decision) 0.02x2 + 0.01x2 + 0.08x3 + 0.25x4 + 0.45x5 + 0.40x6 ≤ 0.20 (weighted average risk of the portfolio) 6x1 + 4x2 + 3x3 + 5x4 +3x5 + 10x6 ≥ 5 (weighted average length of investment) x5 + x6 ≤ 0.25 (limit on investment in real estate and speculated stock) x1, x2, x3, x4, x5, x6 ≥ 0 (non-negativity condition) Illustration 42. A salesman has to visit ive cities A, B, C, D and E. The inter-city distances are tabulated below. Note the distance between two cities need not be same both ways. From / To A B C D E A - 12 24 25 15 B 6 -- 16 18 7 C 10 11 -- 18 12 D 14 17 22 -- 16 E 12 13 23 25 -- Note further that the distances are in km. Required: If the salesman starts from city A and has to come back to city A, which route would you advise him to take that total distance traveled by him is minimised? 126 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT solution: Proit Matrix - 12 24 25 15 6 - 16 18 7 10 11 - 18 12 14 17 22 - 16 12 13 23 25 - Row operation - 0 12 13 3 0 1 10 12 1 0 1 - 8 2 0 3 8 - 2 0 1 11 13 - column operation - 0 4 5 2 0 - 2 4 0 0 1 - 0 1 0 3 0 - 1 0 1 3 5 - A→b→E→D→c→A 12 + 7 + 25 + 22 + 10 = 76 kms optimum Distance 76 kms. Illustration 43. Departmental store wishes to purchase the following quantities of Sprees: Types of sprees Quantity A B C D E 150 100 75 250 200 Tenders are submitted by 4 different manufacturers who undertake to supply not more than the quantities mentioned below (all types of sprees combined): Manufacturer W X Y Z Total quantity 300 250 150 200 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 127 Production Planning and Control The store estimates that its proit/spree will vary with the manufacturer as shown in the following matrix. Sprees Manufacturers A b c D E W 275 350 425 225 150 X 300 325 450 175 100 Y 250 350 475 200 125 Z 325 275 400 250 175 How should the orders be placed? solution: Proit matrix: loss Matrix: 128 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT m + n – 1 allocation s are there, optimality test can be performed. As ∆ij ≥ 0, maximum proit is as follows. Qty W Maximum Proit B 25 x 350 = 8750 D 50 x 225 = 11250 E 200 x 150 = 30000 F 25 x 0 = 0 A 150 x 300 = 45000 F 100 x 0 = 0 Y B 75 x 350 = 26250 C 75 x 475 = 35625 Z D 200 x 250 = 50000 X Max. Proit. ` 2,06,875 Illustration 44. The Bombay Transport Company has trucks available at four different sites in the following numbers: Site A 5 Trucks Site B 10 Trucks Site C 7 Trucks Site D 3 Trucks OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 129 Production Planning and Control Customers – W, X and Y require trucks as shown below. Customer W 5 Trucks Customer X 8 Trucks Customer Y 10 Trucks Variable Costs of getting trucks to the Customers are given below: From A to W ` 7, to X ` 3, to Y `6 From B to W ` 4, to X ` 6 to Y `8 From C to W ` 5, to X ` 8 to Y `4 From D to W ` 8 to X ` 4 to Y `3 Solve the above transportation problem. solution: 130 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT As ∆ij ≥ 0, the solution is optimum. Allocation: Minimum Cost A X 5x3 = 15 B W 5x4 = 20 X 3x6 = 18 Z 2x0 = 0 C Y 7x4 = 28 D Y 3x3 = 25 9 ` 90 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 131 Production Planning and Control Illustration 45. A company has 3 plants located at different places but producing an identical product. The cost of production, distribution cost of each plant to the 3 different warehouses, the sale price at each warehouse and the individual capacities for both the plant and warehouse are given below: Plants F1 F2 F3 Raw material 15 18 14 Other expenses 10 9 12 Sales Price in (`) Distribution cost to warehouse Warehouse Capacity (No) W1 3 9 5 34 80 W2 1 7 4 32 110 W3 5 8 3 31 150 150 100 130 Capacity of Plant (No.) Establish a suitable table giving net proit/loss for a unit produced at different plants and distributed at different locations. (b) Introduce a suitable dummy warehouse / plant so as to match the capacities of plants and warehouses. (c) Find distribution pattern so as to maximise proit / minimise loss. (d) Interpret zero value of square evaluation of an empty cell and ind alternative solutions. solution: Proit matrix 6 -2 3 80 6 -2 2 110 1 -4 2 150 0 0 0 40 150 132 100 130 380 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT loss Matrix: 0 40 8 3 8 4 40 0 110 5 10 4 20 6 130 6 6 40 150 100 130 40 0 0 80/40/0 3/3/5 110/0 4* 150/20/0 1/1/6* 40/0 0/0/0 0 0 2 1 5* 2 1 2 1 0 40 8 3 40 U 0 1 0 8 4 0 110 0 5 2 10 4 2 3 20 130 6 6 6 -2 4 40 0 6 8 2 As there are m+n-1 allocations, optimality test can be performed since ∆ij ≥ 0, Quantity Maximum Proit W1 40 x 6 240 W2 40 x -2 -80 W1 110 x 6 660 W2 20 x -4 -80 W3 130 x 2 260 W2 40 x 0 0 380 Rs. 1000 F1 F2 F3 F4 Dummy Proit ` 1,000/- OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 133 Production Planning and Control Illustration 46. The Tit-Fit Scientiic Laboratories is engaged in producing different types of high class equipment for use in science laboratories. The company has two different assembly lines to produce its most popular product ‘Pressure’. The processing time for each of the assembly lines is regarded as a random variable and is described by the following distributions. Process Time (minutes) Assembly A1 Assembly A2 10 0.10 0.20 11 0.15 0.40 12 0.40 0.20 13 0.25 0.15 14 0.10 0.05 Using the following random numbers, generate data on the process times for 15 units of the item and compute the expected process time for the product. For the purpose, read the numbers vertically taking the irst two digits for the processing time on assembly A1 and the last two digits for processing time on assembly A2. 4134 8343 3602 7505 7428 7476 1183 9445 0089 3424 4943 1915 5415 0880 9309 In the irst stage, we assign random number intervals to the processing times on each of the assemblies. solution: computation of Random Interval for processing Time A1 A2 Process time Minutes Pi ∑Pi Range Pi ∑Pi Range 10 0.10 0.10 0-9 0.20 0.20 0-19 11 0.15 0.25 10-24 0.10 0.60 20-59 12 0.40 0.65 25-64 0.20 0.80 60-79 13 0.25 0.90 65-89 0.15 .095 80-94 14 0.10 1.00 90-99 0.05 1.00 95-99 simulated date for 15 units Random No. Process Time Random No. Process Time Total 1 41 12 34 11 23 2 74 13 76 12 25 3 49 12 43 11 23 4 83 13 43 11 24 5 11 11 83 13 24 6 11 11 83 13 24 7 36 12 02 10 22 8 94 14 45 11 25 134 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 9 54 12 15 10 22 10 75 13 05 10 23 11 00 10 89 13 23 12 08 10 80 13 23 13 74 13 28 11 24 14 34 12 24 11 23 15 93 14 09 182 10 24 167 349 Average Process time for A1 = 182/15 = 12.13 Minutes A2 = 167/15 = 11.13 Minutes For product = 349/15 = 23.27 Minutes Expected process time for the product = 23.27 minutes (12 .13 + 11.13) Illustration 47. A businessman is considering taking over a certain new business. Based on past information and his own knowledge of the business, he works out the probability distribution of the monthly costs and sales revenues, as given here: Cost (in `) Probability Sales Revenue (`) Probability 17000 0.10 19000 0.10 18000 0.10 20000 0.10 19000 0.40 21000 0.20 20000 0.20 22000 0.40 21000 0.20 23000 0.15 24000 0.05 Use the following sequences of random numbers to be used for estimating costs and revenues. Obtain the probability distribution of the monthly net revenue. Sequence 1 Sequence 2 82 84 28 82 36 92 73 91 63 29 27 26 92 63 83 02 10 39 10 10 39 72 38 29 71 83 19 72 92 59 49 39 72 94 04 92 72 18 09 00 b. Repeat the analysis in (a) by using the following random number streams: Sequence 1 Sequence 2 20 63 46 16 45 41 44 66 87 26 78 40 29 92 21 36 57 03 28 08 23 57 99 84 51 29 41 11 66 30 41 80 62 74 64 26 41 40 97 15 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 135 Production Planning and Control solution: cost (`) probability cumulative probability Random Range cost (`) probability cumulative probability Random Range 17000 0.1 0.1 00-09 19000 0.1 0.1 00.09 18000 0.1 0.2 10-19 20000 0.1 0.2 10-19 19000 0.4 0.6 20-59 21000 0.2 0.4 20-39 20000 0.2 0.8 60-79 22000 0.4 0.8 40-79 21000 0.2 1.0 80-99 23000 0.15 0.95 80-94 24000 0.05 1.00 95-99 Month Random No. for cost cost (`) Random No. for sales cost (`) Monthly Net Revenue (`) 1 82 21000 39 21000 - 2 84 21000 72 22000 1000 3 28 19000 38 21000 2000 4 82 21000 29 21000 - 5 36 19000 71 22000 3000 6 92 21000 83 23000 2000 7 73 20000 19 20000 - 8 91 21000 72 22000 1000 9 63 20000 92 23000 3000 10 29 19000 59 22000 3000 11 27 19000 49 22000 3000 12 26 19000 39 21000 2000 13 92 21000 72 22000 1000 14 63 20000 94 23000 3000 15 83 21000 04 19000 (2000) 16 02 17000 92 23000 6000 17 10 18000 72 22000 4000 18 39 19000 18 20000 1000 19 10 18000 09 19000 1000 20 10 18000 00 19000 1000 35000 Average = 35000/20 = ` 1750. 136 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT study Note - 5 pRoDucTIVITy MANAgEMENT AND QuAlITy MANAgEMENT This study Note includes 5.1 Measurement Techniques of productivity Index 5.2 TQM Basic Tools and Certiication 5.3 Iso standard basics 5.1 MEAsuREMENT TEcHNIQuEs oF pRoDucTIVITy INDEX Productivity implies development of an attitude of mind and a constant urge to ind better, cheaper, quicker, easier and safe ways of doing a job manufacturing an article and providing a service. Since the beginning of the industrial era, the manufacturers or producers have been facing the problem of how to use the available resources and factors of production to the best of their ability and capacity so as to get the maximum output with the minimum cost of production. Industrial revolution, social, technological and scientiic developments, changes in economic systems is the various efforts made in this direction and the process of development and changes is still on. New and new machines, methods and technology are being invented and used in the industrial ield to minimise the wastage of men, materials and machines. It is all to increase the productivity. Productivity is the quality or state of being productive. It is some relationship of outputs to inputs. It is a concept that guides the management of a production system, and measures its success. It is the quality that indicates how well labour, capital, materials and energy are utilised. Productivity improvement is sought everywhere because it supports a higher standard of living, helps control inlation, and contributes towards a stronger national economy. Productivity is an indicator relecting the changes in the performance of the enterprise and having some sort of input-output comparisons relating to various activities of an organisation. It also facilitates the management to control and plan its future operations of the enterprise. Productivity is the talk of the day and it is generally regarded as eficiency in industrial production to be measured by some relationship between outputs and inputs. The increase in productivity is looked upon as the key to prosperity at all levels. In its modern sense, it refers to the relationship between the result and the means employed or to be more speciic between the product and the factors used for obtaining it. It is the quantitative relationship between what we produce and (the resources which we use to obtain it. It can also be termed as the ratio of what is produced to what is required to produce it. The higher is the ratio, the greater is the productivity. Thus, it seeks to measure the economic soundness of the use of the means. It means productivity can be considered higher if the same amount of production is obtained with lesser means or it will be lower if the same quantity of produce is obtained with larger quantity of means. It is higher when there is maximum production with the least expense of resources. A productivity index is a device of expressing the ratio between outputs and the inputs of the resources numerically. These indices are prepared by comparing the volume of output of goods with the labour employed on that job or the proits of the irm with the capital employed. If the comparison shows an upward trend in indices, it is a sign of improved or better productivity or vice-versa. The productivity is a measure of how much input is required to achieve a given output. Symbolically: P= O where I P = Productivity; O = Output, I = Input. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 137 Production Planning and Control The output may be measured in terms of the units of goods produced or the value of goods and services produced. The input, on the other hand, can be referred to as the combination of different factors, i.e., raw materials, machinery, worker’s time, power, efforts and imagination of entrepreneur and the managers. A unit of input, therefore, can be expressed as one worker, or one hour of labour time or one tonne of raw materials, or one kw of electricity and so on. Thus, it is very clear from the above description that the productivity can be calculated or measured for each one of the factors comprising the input or of all the factors together. The productivity of labour, for example, can be found out by ascertaining the ratio between the quantity of goods produced and the number of workers or man-hours employed on the production of such output. The importance of the concept of productivity can be viewed from the following points: 1. To beat the competition: It is an age of cut-throat competition. There may be other commodities which can serve as the substitutes of the terms ‘product’ and can attract the consumers’ purchasing power. The irm whose productivity is higher can only beat the competition and can exist in the market for long. 2. guide to Management: The productivity indices are very useful for the management and can be used for different purposes. These indices can serve as a valuable guide to the management for improving the performance of its enterprise. The productivity measures can be used for the following purposes: (a) strategic : With the help of productivity indices, the eficiency of different irms can be measured, analysed and compared. The necessary steps can be taken to improve the productiveness of the irm taking in view the productiveness of the other competitive irms. (b) Tactical: Different units or the sectors of the irm can also be compared as regards to their productivity and the productivity of the less productive units or sectors can be improved. (c) planning: A irm uses different inputs in producing the goods. A comparison of relative beneits accruing from the use of different inputs can be had and the most beneicial input can be used in production. It helps the management to plan for the future. (d) Administration: Productivity indices indicate the progress of the irm over a period of years. The productivity of different inputs, including labour, can be measured individually. The individual productivity indices help the management in bargaining with the labour leaders, trade unions and the Government in case of labour disputes regarding welfare activities. Thus administration can be improved with the help of productivity indices. 3. An Indicator of progress: In economically backward countries, productivity movement is basic aspect of progress. It implies the development of an attitude of mind and a constant urge to better, cheaper, quicker and safer ways of doing a job, manufacturing a product and providing a service. In an urge to improve the productivity, new inventions take place. This productivity is an aspect of basic progress. 4. Maximum utilisation of scarce Resources: In order to provide the articles or commodities to the consumers at the lowest possible cost, the productivity urges to utilise the available resources to the maximum to the satisfaction of customers. The productivity processes and techniques are designed to facilitate more eficient work involving less fatigue to workers by improvements in the layout of the plant and work, better working environment and simpliication of works. 5. key to National prosperity: The productivity, in fact, has become the synonymous to progress. Higher productivity is an index of more production with the same inputs at lower cost. It enables industry to offer goods to the general public at cheaper rates and results in expansion of markets. The working conditions and wages of workers will improve and industrialists too will get larger proits. Thus higher productivity is the key to national prosperity. The secrets of Japan and Western countries’ prosperity lie in increased productivity. 6. prosperity to labour: The higher productivity is a boon to labour also. It brings improved working conditions, better wages and salaries to workers, better labour welfare activities to labourers. Thus their standard of living is improved. 7. other uses: (i) Higher productivity increases the proits and reserve funds of the industry that can be used for expansion and modernisation. (ii) It increases the goodwill of the irm due to cheaper goods to the public, well-off staff and more proits and better inancial position. 138 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (iii) It improves the competitive strength of the company in export markets through reduction in cost of production and quality products. In this way, productivity is the only way to make the overall progress of the country. Measurement of productivity: The productivity or the performance of various input and output factors can be measured in many ways. These measures are mainly based on the following two criteria: (i) change in output per unit of input: indicates the change in the performance of corresponding input during the given period, e.g., change in output per worker or per man-hour will signify the change in performance of labour. (ii) change in input per unit of output: during the given period signiies the change in the performance of the corresponding input factor, e.g., change in man-hour or workers’ per unit of output will also indicate the change in the performance of the labour input. Productivity measurement implies the use of standards set for each input factor in terms of output. In circumstances where standards are not in use, productivity can be measured only when the output is converted into ‘units or work’ which is deined as the amount of work that can be performed by one unit of input. Thus productivity can be measured by dividing the output by the performance of each input factor taken together. some of the well-known indices of productivity are given below: (A) Man-hour output: The most widely used index of productivity is to work out the output per manhour it can be put as – productivity = units of output / Total man-hours (B) productivity Ratio: The rate of return on capital employed is a valuable and widely used guide to many types of business decisions. This ratio of proit to capital employed is a valuable means of measuring the performance of divisions, sections, plants, products and other components of a business, and can be calculated as— Productivity = Net Proit / Capital employed (C) use of Financial Ratios: There are many situations when time standards cannot be set and therefore, it is very dificult in such cases to measure the productivity by a direct method. In these cases, inancial ratios can be used to measure the productivity by using its sales turn-over. But ‘added value’ is a more useful approach for measuring productivity. ‘Added value’ means output - inputs. The most common inancial ratio of productivity is— Productivity = Added Value / Labour Costs Productivity = Added Value / Conversion Costs The irst ratio gives the inancial productivity of labour force and the second ratio gives the inancial productivity of all the resources of the company put together. (D) other useful Measures: There are many other useful productivity ratios to measure the productivity of various input factors. These are: (i) Manpower Productivity = Value of output of goods or services No. of workers or man hours used (ii) Materials Productivity = Value of output of goods or services Units (or cost) of materials used (iii) Capital Productivity = Value of output of goods or services Capital assets employed (iv) Energy Productivity = Value of output of goods or services Units (or cost) of energy used OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 139 Production Planning and Control A combined measure of productivity can be taken as Productivity = Value of output of goods or services Values of (labour + capital + materials + others inputs) There may be other input factors such as insurance, taxes, advertising etc. and their productivity can be measured likewise. Each measure requires different kinds of data and only rarely such information is available for all commodities in an industry on continuous basis. Tools of productivity or how to increase productivity: The productivity of an enterprise can be improved by improving the performance of various inputs and other factors affecting productivity. For this purpose, use of following tools can be recommended. 1. Human Aspects: Under this, cooperation of workers is sought in the following ways: (i) More workers’ participation in management or in decision making through joint consultation. (ii) Improving communication services. (iii) Improving mutual trust and cooperation through improved job procedures, better training of employees, more workers incentives by implementing various incentive schemes, and labour welfare programmes. (iv) Better planning of work, more effective management, more democracy in administration, improved human relations and selection and training of personnel at various levels of management are some human efforts from the side of management in order to improve the productivity. 2. supply of Inputs: (i) Improvement in the nature and quality of raw materials and their supplies to the work. (ii) Proper provision of plant, equipment and their maintenance. (iii) Introduction of more and more machines and equipment in place of physical work. (iv) Fuller utilisation of manpower and eficiency or capacity of plant and equipment employed. 3. Technological Aspects: Certain methodological and technological developments are also necessary to improve the productivity of the concern. These are; (i) Work, time and motion studies to determine better ways and means of doing a job. (ii) Implementing various simpliication, specialisation and standardisation programmes. (iii) Applying control techniques comprising production and planning control, cost control and quality control techniques. (iv) Improving layout of plants, shops and machine tools, and material handling and internal transportation system. (v) Improving inspection techniques so as to minimise the wastage and defective work. Factors affecting industrial productivity: Productivity is deined to be some ratio between output and input. Thus all factors which affect output and inputs will also affect the measure of productivity. The following factors affect the productivity. 1. 140 Technological Development: Technical factors including the degree of mechanisation, technical know-how, raw materials, layout and the methods and techniques of work determine the level of OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT technological development in any industry. The principal factors in technological development affecting productivity are: (a) The size of the plant: The size of the plant and the capacity utilisation has direct bearing on productivity. Production below or above the optimum level will be uneconomical and will tend towards lower level of productivity. (b) Research and Development: Investment in research and development may yield better method of work and better design and quality of products. (c) plant and Job layout: The arrangement of machines and positions in the plant and the set-up of the work-bench of an individual worker will determine, how economically and eficiently production will be carried out. (d) Machine and Equipment Design: Whether the design of machinery and equipment is modern and in keeping with the limitations and capacities of the workers will also determine the production eficiency and level of productivity. (e) production processes: Advanced production processes involving the use of modern integrated and automatic machinery and semi-processed materials have been known to help in raising levels of productivity. (f) power, Raw Materials etc. Improved quality of raw materials and increased use of power have a favourable effect on productivity. (g) Scientiic Management Techniques: Scientiic management techniques such as better planning of work, simpliication of methods, time and motion study, emphasis for reduced wastage and spoilage have positive effects on productivity. It will be realised that technological development requires a great amount of funds and general economic and technical environment in the country. Thus capital plays an important role in increasing the productivity through implementing technological development. It should also be recognised that such developments inluence the job performance of employees. With better machines, tools and processes, it should be considered that both ability and willingness to work should be increased. 2. Individual Factors: Individual factors such as knowledge, skill and attitude also affect the productivity of industry. Knowledge is acquired through training, education and interest on the part of learner. Skill is affected by aptitude (one’s capacity to learn a particular kind of work), personality (emotional maturity, balance of mind etc.) as also by education, experience, training etc. Increased knowledge, skill and aptitude certainly increased the productivity and a person deicient in these personal attributes is less productive than an average man. The attitude (willingness of employee to work for organisation) of employees towards the work and the organisation affect their productivity to a great extent. Knowledge and skill without willingness are futile. The urge to work is a complex phenomenon governed by several factors such as formal and informal organisation, leadership, need, satisfaction, inluence of trade unions etc. These factors motivate the workers to work better and with enthusiasm. 3. organisation Factors: Organsiation factors include various steps taken by the organisation towards maintaining better industrial relations such as delegation and decentralisation of authority, participative management (workers’ participation in management), organisational eficiency, proper, personnel policies relating to selection, placement, promotion, wage salary levels, incentives, merit rating, job evaluation, training and provision for two-way communication, supervision, etc. These factors also inluence motivation. Likewise the existence of groups with higher productivity as their goal is likely to contribute to the organisational objectives. These facts were brought out by Hawthorne experiments in U.S.A. A properly-motivated worker will certainly contribute to the industrial productivity. 4. Work Environment: The importance of proper work environment and physical conditions on the job has been emphasised by industrial psychologists and human engineers. Better work environment ensures the greatest ease at work through better ventilation and light arrangement, improved safety devices, reduction in noise, introducing suitable rest-pause etc. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 141 Production Planning and Control 5. other factors: There are several other factors that affect productivity. These are: (a) Natural Factors: Physical, geographical and climatic conditions inluence the productivity at large. Abundance of natural resources affects the productivity and similarly climate affects the eficiency of workers to a great extent. (b) Managerial Factors: The industrial productivity is inluenced very much through managerial ability and leadership. The managerial ability of utilising the available resources to the maximum, organising capacity, foresightedness, decision-making ability and entrepreneurship are certain factors that contribute to productivity. (c) government policy: Government policies towards industry also contribute to industrial productivity. Taxation policy, inancial and administrative policy, tariff policy and protection policy affect the productivity to a large extent. Thus, the above factors are responsible for the increased productivity. production and productivity: Production and productivity are not synonymous. Production refers to the volume, value or quantity of goods and services produced during a given period by a worker, plant, irm or economy. It is the sum total of results achieved by the various factors used together. Productivity, on the other hand, is not concerned with the volume of production. It is the ratio of output and input factors of an enterprise. It shows the eficiency of production or the eficiency level of input factors. In other words, productivity is relative to the resources used in turning out a certain amount of physical output, while production is used, more or less, in absolute sense. The distinction between (lie two terms becomes more clear when we ind that increase in production does not necessarily mean the increase in productivity. If increase in production is attributed to the increase in the inputs of production in the same proportion, the production will have increased but productivity may have declined or may remain constant because the ratio of output and inputs has shown a decline or has not shown any improvement. Illustration 1. In a particular plant there are 10 workers manufacturing a single product and the output per month consisting of 25 days of that particular product is 200. How much is the monthly productivity? solution: Monthly productivity per worker = 200 = 20 units 10 Illustration 2. There are two industries A and B manufacturing hose couplings. The standard time per piece is 15 minutes. The output of two small scale industries is 30 and 20 respectively per shift of 8 hours. Find the productivity of each per shift of 8 hours. What is the expected production of each per week consisting of 6 days? solution: Productivity = Actual production Standard production Standard production of hose complings per shift = 8 × 60 = 32 pcs. 15 30 15 20 5 = and productivity of industry B = = 32 16 32 8 15 If the productivity is expressed in percentage, the same for A is × 100 = 93.75% 16 5 and productivity of industry B is × 100 = 62.5% 8 Productivity of industry A = Production per week of industry A = 30 × 6 = 180 nos. Production per week of industry B = 20 × 6= 120 nos. 142 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Illustration 3. The following data is available for a machine in a manufacturing unit: Hours worked per day 8 Working days per month 25 Number of operators 1 Standard minutes per unit of production Machine time 22 Operator time 8 Total time per unit 30 (i) If plant is operated at 75% eficiency, and the operator is working at 100% eficiency, what is the output per month? (ii) If machine productivity is increased by 10% over the existing level, what will be the output per month? (iii) If operator eficiency is reduced by 20% over the existing level, what will be the output per month? solution: (a) Hours worked per day = 8 Working days per month = 25 Hours worked per month = 25 × 8 = 200 hrs. Machine time = 22 minutes Operator time = 8 minutes Total per unit = 30 minutes = ½ hr. No. of units produced/month/operator = 200 = 400 1/ 2 As the no. of operator is 1, monthly production = 400 units. As the plant operates at 75% eficiency. Monthly production = 400 × (b) 75 = 300 units. 100 If machine productivity is increased by 10% i.e. Machine time = 22 × Then, total time = 20 + 8 = 28 minutes Monthly production = (c) 100 = 20 minutes. (100 + 10) 400 × 30 75 × = 321 units. 28 100 If operator eficiency reduced by 20% i.e. Operator time = 8 × (100 + 20)6 = 8 × 7.2 = 57.6 minutes. 100 Total time = 22 + 57.6 = 79.6 minutes. Monthly production = 400 × 30 75 = 113.06 units = 113 units. × 79.6 100 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 143 Production Planning and Control Illustration 4. The following data is available for a manufacturing unit : No. of operators : 15 Daily working hours : 8 No. of days per month : 25 Std. production per month : 300 units Std. Labour hours per unit : 8 The following information was obtained for November 2015: Man days lost due to absenteeism : 30 Unit produced : 240 Idle Time : 276 man hours Find the following:— (a) Percent absenteeism (b) Eficiency of utilisation of labour (c) Productive eficiency of labour (d) Overall productivity of labour in terms of units produced per man per month. solution: No. of days per month = 25 Daily working hrs. = 8 No. of operators = 15 No. of Man days = 15 × 25 = 375 Man days. Total working hrs. = 375 × 8 = 3,000 Hours lost in absenteeism = 30 × 8 = 240 (i) Percent absentees = 240 hrs. × 100 = 8% 3000 hrs (ii) Eficiency of utilisation of labour = Standard labour hour to produce 240 units 240 × 8 = = 64% Total labour hour 3000 (iii) Standard time required to produce 240units = 240 ×8 = 1920 labour-hours. In November, man hours lost = 30 × 8 = 240 „ = 276 „ idle time Total loss of time = 516 hours. Productive hours available in November = 3000 Less, Total loss of time = 516 Actual labour-hours = 2484 hours Eficiency of labour = 144 Std. Labour hrs. 1920 × 100 = = 77.3% Actual Labour hrs. 2484 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (v) 15 men produces 300 units, Std. labour productivity = 300/15 = 20 units. In November, overall productivity = 240/15 = 16 units. (Ans.) i.e. productivity falls by 25%. Illustration 5. An incentive scheme allows proportionate production bonus beyond 100% performance level. Calculate the amount of (i) Incentive bonus and (ii) Total payment received by an operator on a particular day during which the following particulars apply: (iii) Operation : Assembling pocket transistor radio set Work Content : 30 Standard minutes per assembled set Attended Time : 8 Hours Time spent on unmeasured work : 2 Hours Numbers of sets assembled during the day : 15 Wage rate : ` 4 per hour What is the net labour productivity achieved by the operator during the day? solution: Total standard minutes worked during the day = 30 × 15 = 450, working time = 8 – 2 = 6 hours = 360 minutes. Performance = (450 × 100) /360 = 125% or 0.25 (i) Incentive bonus = 0.25 × 6 × 4 = ` 6 for six hours on measured work (ii) Guaranteed wage for 8 hours = 8 × 4 = ` 32; Total earnings for the days = ` (6 + 32) = ` 38 (iii) Net labour productivity = Output in units / Net man hours = 15 / 6 = 2.5 sets per hour. 5.2 TQM bAsIc Tools AND cERTIFIcATIoN What is Total Quality Management (TQM)? A philosophy that involves everyone in an organisation in a continual effort to improve quality and achieve customer satisfaction. basic concepts in TQM 1. Top management commitment and support. 2. Focus on both internal and external customers. 3. Employee involvement and empowerment. 4. Continuous improvement (KAIZEN) 5. Partnership with suppliers 6. Establishing performance measures for processes. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 145 Production Planning and Control Essentials of TQM Focus 1. Customer satisfaction 2. Leadership 3. Quality policy 4. Organisation structure 5. Employee involvement 6. Quality costs 7. Supplier selection and development 8. Recognition and reward. underlying principles in TQM 1. Strive for quality in all things (Total Quality) 2. The customer is the creation of quality 3. Improve the process or systems by which products are produced 4. Quality improvement is continuous, never ending activity (continuous improvement-Kaizen) 5. Worker involvement is essential 6. Ground decisions and actions on knowledge 7. Encourage team work and cooperation. scope of TQM 1. Are integrated organisational infrastructure 2. A set of management practices 3. A wide variety of tools and techniques. QM is Japanese approach to quality. The term TQM refers to a quest-for quality in an ganization. TQM is a process that underlines three philosophies. One is never-ending push to improve, which is referred to as continuous improvement; the second is the involvement of every employee in the organization and the third is the goal for customer satisfaction, which means meeting or exceeding customer expectations. It often focuses on benchmarking world-class standards, product and service design and purchasing. In addition, TQM involves a number of other elements such as: • Team approach, • Employee empowerment • Decisions based on facts rather than opinions, • Knowledge of quality tools [low charts, check sheets, histograms, pareto analysis, scatter diagrams etc.] • Quality at the source and • Inclusive of supplies as a part of quality improvement programme. TQM is a process of continuous improvement at every level of the organization-the centre of the entire process is customer satisfaction. TQM implies that the organization is doing everything it can to achieve quality at all stages of the process, from customer demands, to product design, to engineering. 146 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT TQM seeks to breakdown communication barriers among employees and also between the organization and its external stakeholders, in order to increase cross-functional integration and provide new avenues for co-operation to improve quality. It would be incorrect to think of TQM merely a collection of techniques. Rather, TQM relects a whole new attitude toward quality. It is about the culture of an organization. To truly reap the beneits of TQM, the culture of an organizations must change. In other words, TQM organization strives to develop co-operative relationships with its suppliers and distributors so that continuous improvement of quality becomes their goals too. Ford, Motorola, and GM have taken steps to develop long-term relationships with their suppliers and distributors. 5.3 Iso sTANDARD bAsIcs Quality Certiication Many international businesses recognize the importance of quality certiication. The EU, in 1987, established ISO [International Organisation for Standardisation] 9000 certiication. Two of the most well known of these are ISO 9000 and ISO 14,000. ISO 9000 pertains to quality management. It concerns what an organization does to ensure that its products or services are suitable to customers expectations. ISO 14,000 concerns minimization of harmful effects to the environment caused by its operations. Both ISO 9000 and ISO 14000 are related to an organization processes rather than its products and services and they stress continual improvement. ISO 9000 is composed of the national standard bodies of 91 countries. About 90 countries have adopted ISO 9000 as national standards. This certiication is intended to promote the idea of quality at every level in the organisation. ISO certiication is an elaborate and expensive process. Any irm seeking this certiication needs to document how its workers perform every function that affects quality and install mechanisms to ensure that, they follow on expected lines. ISO 9000 certiication entails a complex analysis of management systems and procedures. Rather than judging the quality of a particular product, ISO 9000 evaluates the management of the entire manufacturing process, from purchasing, to design, to training. A irm that seeks this certiication must ill out a report and then be certiied by a team of independent auditors. With certiication comes registration in an ISO directory, that irms seeking suppliers can refer to, for a list of certiied companies. They are generally given preference over unregistered companies. There are essentially ive standards associated with the ISO 9000 series. The series, if we place them on a continuum, would range from design and development through procurement, production, installation and servicing. Whereas, ISO 900X3 and 9004 only establish guidelines for operation, ISO 9001, 9002 and 9003 are well-deined standards. Quality system 9001 Model for Quality Assurance in Design, Production, Installation and Servicing. (To be used when conformance to speciied requirements is to be assured by the supplier during several stages that may include design/ development, production, installation and servicing). 9002 Model for Quality Assurance in Production and Installation. (To be used when conformance to speciied requirements is to be assured by the supplier during production and installation). 9003 Model for Quality Assurance in Final Inspection Test. (To be used when conformance to speciied requirements is to be assured by the supplier solely at inal inspection and test). guidelines for use 9000 Quality Management and Quality Assurance Standards - Guidelines for Selection and Use. 9004 Quality Management and Quality System Elements - Guidelines. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 147 Production Planning and Control Iso 9000 standards, their Areas of Application in production Flow and guidelines for use Design/ Development Procurement Production Installation Servicing ISO 9003 ISO 9002 ISO 9001 ISO certiication is a must for doing business with any member of the EU. In addition to the beneits of accessing the EU, ISO 9000 certiication and registration is particularly helpful for companies that do not currently have a quality management system, as it provides guidelines for establishing the system and making it effective. The latest version of ISO 9000 2000 forms the basis of eight quality management principles. 1. A system approach to management 2. Continual improvement 3. Actual approach to decision making 4. Mutually beneicial supplier relationships 5. Customer focus 6. Leadership 7. People involvement 8. Process approach. soME MoRE EXAMplE: Illustration 6. Compute the productivity per machine hour with the following data. Also draw your interpretation. Month No. of machines employed Working hours January 400 220 99,000 February 550 180 1,00,000 March 580 220 1,25,000 No. of machines employed Working hours Production Units Answer: Month Machine hours Production Units January 400 220 88,000 99,000 February 550 180 99,000 1,00,000 March 580 220 1,27,600 1,25,000 148 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT P = Productivity per machine hour = Number of units produced /Machine hours For January P = 99,000/88,000 = 1.125 February P = 100,000 / 99,000 = 1.010 March P = 125,000 /127,600 = 0.980 Interpretation: Though the total production in number of units is increasing, the productivity is declining. Illustration 7. Calculate the standard production per shift of 8 hours duration, with the following data: Observed time per unit = 5 minutes, Rating Factor -120%, Total allowances = 30% of normal time. Answer: Normal time per unit = Observed time / unit × Rating factor = 5 ×(120/100) = 6minutes Allowances = 30% of normal time = (30 × 6)/100 = 1.8 minutes Standard time/unit = Normal time/unit + Allowances = 6 + 1.8 = 7.8 minutes / unit Standard production in shift of 8 hours = (8×60)/7.8 = 61.54 units. Illustration 8. Compute the productivity per machine hour with the following data. Also draw your interpretation. Month No. of machines employed Working hours Production Units July 400 225 99,000 August 500 200 1,00,000 September 600 250 1,35,000 Answer: The table is drawn as under: Month No. of machines employed Working hours Machine Hours Production Units July 400 225 90,000 99,000 August 500 200 1,00,000 1,00,000 September 600 250 1,50,000 1,35,000 We know, P = Productivity per machine hour, = Number of units produced / Machine hours For March P = 99,000/90,000 = 1.1 April P = 100,000/100,000 =1 May P = 135,000 /l 50,000 = 0.9 Interpretation: Though the total production in number of units is increasing, the productivity is declining. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 149 Production Planning and Control Illustration 9. A department works on 8 hours shift, 288 days a year and has the usage data of a machine, as given below: Product Annual Demand (units) Processing time (Standard time in hours) A 325 5.0 B 450 4.0 C 550 6.0 Calculate (a) Processing time needed in hours to produce products A, B and C, (b) Annual production capacity of one machine in standard hours, and (c) Number of machines required Answer: (a) The processing time needed in hours to produce products A, B and C in the quantities demanded using the standard time data: Product Annual Demand (units) Processing time (standard time in hours) Processing time needed (hrs.) A 325 5.0 325 × 5 = 1,625 B 450 4.0 450 × 4 = 1,800 C 550 6.0 550 × 6 = 3,300 Total = 6,725 hrs. (b) Annual production capacity of one machine in standard hours = 8 × 288 = 2,304 hours per year. (c) Number of machines required = Work load per year / Production capacity per Machine = 6,725 / 2,304 = 2.90 machines = 3 machines. Illustration 10. Compute the productivity per machine hour with the following data. Also draw your interpretation. Answer: P = Productivity per machine hour = Number of units produced /Machine hours For March P = 99,000 / 90,000 =1.1 April P = 100,000 / 100,000 = 1 May P = 135,000 /150,000 = 0.9 Interpretation: Though the total production in number of units is increasing, the productivity is declining. 150 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT study Note - 6 pRoJEcT MANAgEMENT This study Note includes 6.1 project planning 6.2 gantt charts 6.3 pERT and cpM 6.1 pRoJEcT plANNINg Planning begins with well-deined objectives. The project team may be drawn from several organizational departments, e.g., engineering, production, marketing, and accounting. Project deinition involves identifying the controllable and uncontrollable variables involved, and establishing project boundaries. Performance criteria should relate to the project objectives, which are often evaluated in terms of time, cost, and resource utilisation. Project planning is part of project management, which relates to the use of schedules such as Gantt charts to plan and subsequently report progress within the project environment. project management is the discipline of organizing and managing resources (e.g. people) in such a way that the project is completed within deined scope, quality, time and cost constraints. A project is a temporary and one-time endeav or undertaken to create a unique product or service, which brings about beneicial change or added value. This property of being a temporary and one-time undertaking contrasts with processes, or operations, which are permanent or semipermanent ongoing functional work to create the same product or service over and over again. The management of these two systems is often very different and requires varying technical skills and philosophy, hence requiring the development of project managements. The irst challenge of project management is to make sure that a project is delivered within deined constraints. The second, more ambitious challenge is the optimized allocation and integration of inputs needed to meet predeined objectives. A project is a carefully deined set of activities that use resources (money, people, materials, energy, space, provisions, communication, etc.) to meet the predeined objectives. Initially, the project scope is deined and the appropriate methods for completing the project are determined. Following this step, the durations for the various tasks necessary to complete the work are listed and grouped into a work breakdown structure. The logical dependencies between tasks are deined using an activity network diagram that enables identiication of the critical path. Float or slack time in the schedule can be calculated using project management software. Then the necessary resources can be estimated and costs for each activity can be allocated to each resource, giving the total project cost. At this stage, the project plan may be optimized to achieve the appropriate balance between resource usage and project duration to comply with the project objectives. Once established and agreed, the plan becomes what is known as the baseline. Progress will be measured against the baseline throughout the life of the project. Analysing progress compared to the baseline is known as earned value management. gantt chart: Gantt Chart is a principal tool used in scheduling and also in some methods of loading. This chart was originated by the American engineer Henry L. Gantt and consists of a simple rectangular grid, divided by series of parallel horizontal and verticular lines. The vertical lines always divide the horizontal scale units of time. The time units can be in years, months, weeks, days, hours, minutes or even seconds according to the work for which it is prepared. In this chart, the time which an activity takes in completing the task is represented by the horizontal line. The length of the line is drawn in proportion to the duration of time. Generally, the time in the chart should low from left to right and activities be listed from top to bottom. The progress of the work may be shown by a bar or a line within the uprights of the activity symbol and its length should represent the amount of work completed. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 151 Project Management Horizontal lines divide the chart into sections which can represent various work tasks (work schedule) or work centres (load schedule). When it shows only work tasks-products, orders, or operations to be completed, it is known as Work Schedule. When it shows the same task opposite the work centres at which they are produced-factories, departments, workshops, machine tools or men it is known as Load Chart. The units scheduled or loaded on these charts are always the same because these work tasks are known as having a known standard time. The work tasks can be represented on the chart by numbers or symbols. The symbols used on the chart may van from company to company. Network Analysis: Routing is the irst step in production planning. In small projects, routing is very simple. Sequence of operations is almost decided and the operations can be performed one after the other in a given sequence. But in large project, this is rather a dificult problem. There may be more than one route to complete a job. The function of production manager is to ind out the path which takes the least time in completing the project. In a big project, many activities are performed simultaneously. There are many activities which can be started only at the completion of other activities. In such cases, a thorough study is required to collect the complete details about the project and then to ind out a new, better and quicker way to get the work done in a decent way. In such cases, the irst step is to draw some suitable diagram showing various activities and their positions in the project. It should also explain the time to be taken in completing the route from one operation to the other. It also deines the way in which the delay in any activity can affect the entire project in terms of both money and time. Such a diagram is called network diagram. A network is a picture of a project, a map of requirements tracing the work from a departure points to the inal completion objective. It can be a collection of all the minute details involved or only a gross outline of general functions. Important characteristics in a Network Analysis: The following are some important points to remember in a network analysis: (i) The objective is to be inished within the speciied time otherwise there is a penalty. (ii) Various activities are to be completed in an order; however, a number of activities are performed simultaneously while there are many other activities, which can be started only when some other activities are completed. (iii) The cost of any activity is proportional to its time of completion. (iv) There can be hurdles in the process and the resources to be allocated may be limited. A network graph consists of a number of points or nodes, each of which is connected to one or more of the other nodes by routes or edges. It is a set of operations and activities describing the time orientation of a composite project. procedure for drawing a network diagram: The procedure for drawing a network diagram may be explained below. There are three basic questions and the network depends on them. These questions are: • Which operation must be completed before each given operation can be started? • Which activities can be carried out in parallel? • Which operation immediately succeeds other given activities? The common practice is simply to work backward through the list of operations, generating the immediate predecessors for each operation. Slack and loat: Slack - Slack signiies the freedom for rescheduling or to start the job. It can be calculated by the difference between EFT and LFT for any job. A job for which the slack time is zero is known as critical job. The critical path can be located by all those activities or events for which slack time is either zero or loat time is the least. The abbreviations EFT and LFT given in the above line have the following explanation. EFT (Earliest Finish Time) - this is the sum of the earliest start time plus the time of duration for any event. 152 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT lFT (latest Finish Time) - It is calculated from the LFT of the head event. For its calculation total project time is required. The total project time is the shortest possible time required in completing the project. Floats - Floats in the network analysis represent the difference between the maximum time available to inish the activity and the time required to complete it. There are so many activities where the maximum time available to inish the activity is more than the total time required to complete it. This difference is known as loats. Floats may be total, free, and independent: Total Float: Total loat is the maximum amount by which duration time of an activity can be increased without increasing the total duration time of the project. Total loat can be calculated as follows: (i) First, the difference between Earliest Start Time (EST) of tail event and Latest Finish Time (LFT) of head event for the activity shall be calculated. (ii) Then, subtract the duration time of the activity from the value obtained in (i) above to get the required loat for the activity. The total loat can be helpful in drawing the following conclusions: (a) If total loat value is negative, it denotes that the resources for completing the activity are not adequate and the activity, therefore, cannot inish in time. So, extra resources or say critical path needs crashing in order to reduce the negative loat. (b) If the total loat value is zero, it means the resources are just suficient to complete the activity without any delay. (c) If the total loat value is positive, it points out that total resources are in excess of the amount required or the resources should be reallocated to avoid the delay otherwise the activity will be delayed by so much time. Free Float: It is that fraction from total loat of an activity which can be used for rescheduling the activity without affecting the succeeding activity. If both tail and head events are given their earliest times, i.e., EST and EFT the Free Float can be calculated by deducting head slack from total loat, i.e., Free Float = Total loat - Slack time of the head event. Independent Float: It is the time by which an activity can be rescheduled without affecting the other activities – preceding or succeeding. It may be calculated as follows: = Earliest Start Time (EST) - Earliest Finish Time (EFT) of the activity or, Independent Float = Free Float -Slack Time of tail event. The basic difference between slack and loat time is that a slack is used with reference to events whereas loat is used with reference to activity. use of Float Information in Decision Making: The loat information can be used in decision-making in the following ways: (i) Total loat can affect both the previous and the subsequent activities. (ii) Total loat can be used without affecting the subsequent activities. (iii) Independent loat can be used in allocating the resources elsewhere and increasing the time of some noncritical activities. (iv) Negative loat signiies reduction in target time to inish the work in time. critical path Method (cpM): The critical path analysis is an important tool in production planning and scheduling. Gnatt charts are also one of the tools of scheduling but they have one disadvantage for which they are found to be unsuitable. The problem with Gnatt Chart is that the sequence of operations of a project or the earliest possible date for the completion of the project as a whole cannot be ascertained. This problem is overcome by this method of Critical Path Analysis. CPM is used for scheduling special projects where the relationship between the different parts of projects is more complicated than that of a simple chain of task to be completed one after the other. This method (CPM) can be used at one extreme for the very simple job and at other extreme for the most complicated tasks. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 153 Project Management A CPM is a route between two or more operations which minimises (or maximises) some measures of performance. This can also be deined as the sequence of activities which will require greatest normal time to accomplish. It means that the sequence of activities which require longest duration are singled out. It is called at critical path because any delay in performing the activities on this path may cause delay in the whole project. So, such critical activities should be taken up irst. One of the purposes of critical path analysis is to ind the sequence of activities with the largest sum of duration times, and thus ind the minimum time necessary to complete the project. The critical series of activities is known as the ‘critical path’. Under CPM, the project is analysed into different operations or activities and their relationship are determined and shown on the network diagram. So, irst of all a network diagram is drawn. After this the required time or some other measure of performance is posted above and to the left of each operation circle. These times are then combined to develop a schedule which minimises or maximises the measure of performance for each operation. Thus CPM marks critical activities in a project and concentrates on them. Thus CPM technique is a very useful analysis in production planning of a very large project. pERT (programme Evaluation and Review Technique): There are so many modem techniques mat have developed recently for the planning and control of large projects in various industries especially in defence, chemical and construction industries. Perhaps, the PERT is the best known of such techniques. PERT is a time-event network analysis technique designed to watch how the parts of a programme it together during the passage of time and events. This technique was developed by the special project ofice of the U.S. Navy in 1958. It involves the application of network theory to scheduling, problems. In PERT we assume that the expected time of any operation can never be determined exactly. Major Features of pERT or procedure or Requirement for pERT: The following are the main features of PERT: (i) All individual tasks should be shown in a network. Events are shown by circles. Each circle represents an event—an event —a subsidiary plan whose completion can be measured at a given time. (ii) Each arrow represents an activity —the time - consuming elements of a programme, the effort that must be made between events. (iii) Activity time is the elapsed time required to accomplish an event. In the original PERT, three-time values are used as follows: • t1 (Optimistic time): It is the best estimate of time if every tiling goes exceptionally well. • t2 (Most likely time): It is an estimated time what the project engineer believes necessary to do the job or it is the time which most often is required if the activity is repeated a number of times. • t3 (Pessimistic time): It is also an activity under adverse conditions. It is the longest time and rather is more dificult to ascertain. The experiences have shown that the best estimator of time out of several estimates made by the project engineer is: 2 t + 4t2 + t3 t −t  t= 1 and the variance of t is given by: V (t) =  3 1  6  6  (iv) The next step is to compute the critical path and the slack time. A critical path or critical sequence of activities is one which takes the longest time to accomplish the work and the least slack time. Difference in PERT and CPM - Although these techniques (PERT and CPM) use the same principles and are based on network analysis yet they are in the following respects from each other: (i) 154 PERT is appropriate where time estimates are uncertain in the duration of activities as measured by optimistic OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT time, most likely time, and pessimistic time, whereas CPM (Critical Path Method) is good when time estimates are found with certainty. CPM assumes that the duration of every activity is constant and therefore every activity is critical or not. (ii) PERT is concerned with events which are the beginning or ending points of operation while CPM is (iii) PERT is suitable for non-repetitive projects while CPM is designed for repetitive projects. (iv) PERT can be analysed statistically whereas CPM not. (v) PERT is not concerned with the relationship between time and cost, whereas CPM establishes a relationship between time and cost and cost is proportionate to time. 6.2 gANTT cHARTs Gantt chart is a graphical representation of a series of activities drawn to a time scale. Horizontal axis (X-axis) represents time and vertical axis (Y-axis) shows the activities to be performed. The Gantt chart shows activities to speciic jobs at individual/work centers by horizontal bars. Also known as a ‘bar chart’ because of its graphic presentation of the information, the position and the length of the horizontal bar indicate the start and completion date of the activity. strengths of gantt charts Gantt charts are preferred for various reasons, which are as follows: • Very simple to understand by everyone e.g. foreman, engineers, managers, and top management. • Provide useful information in a format that is simple to develop and interpret. • It is a good tool for planning as well as monitoring the progress of the work. It helps schedulers to evaluate the progress of a project at various levels. • Helps in loading the work center in relation to the available capacity. • It provides the user with a quick, visual indication of the actual status of each order and its anticipated or planned status. • The scheduler could easily incorporate changes in timing, machine loads, and current status. • Some common changes make Gantt charts fairly lexible to apply. It indicates the need for reassessing the resources incase the load at one work station becomes too much. Workforce could be temporarily adjusted to meet the high demand of the heavily loaded workstation by shifting the manpower from a relatively less loaded work center. Even multi-purpose equipments are shifted from less loaded work centers to heavily loaded work centers. • Gantt charts suit the requirements of a wide range of media from ruled paper to mechanical devices and computer systems. limitations • It does not convey the variability of the task duration, equipment performance (including breakdowns), and human potential, any one of which could inluence the accuracy of loading the work centers. • It does not clearly indicate the details regarding progress of activities. • It does not give a clear indication of the interrelationship between separate activities. • The chart is static and has to be updated periodically to account for new job arrivals and revised time estimates for existing jobs. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 155 Project Management Illustration 1. A project consists of seven activities. Activities P, Q, R run simultaneously. The relationships among the various activities is as follows: Activity Immediate successor P S Q T R U Activity “V is the last operation of the project and it is also immediate successor to S, T and U. Draw the network of the project. solution: Illustration 2. Project with the following data is to be implemented. Draw the network and ind the critical path. Activity predecessor Duration (days) cost (` Day) A - 2 50 B - 4 50 C A 1 40 D B 2 100 E A,B 3 100 F E 2 60 1. What is the minimum duration of the project? 2. Draw a Gantt chart for early start schedule. 3. Determine the peak requirement money and day on which it occurs above schedule. solution: 156 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Critical Path 1-2-3-4-5 Minimum time =9 Table: Activity Relationship Activity t Es (EF- t) EF ls (lF- t) lF A B C D E F 2 4 1 2 3 2 0 0 4 4 4 7 2 4 5 6 7 9 2 0 8 7 4 7 4 4 9 9 7 9 Event slack (ls-Es) (lF-EF) 2 0 4 3 0 0 on critical path No Yes No No Yes Yes Illustration 3. A project has the following time schedule Activity 1-2 1-3 1-4 2-5 3-6 3-7 4-6 5-8 6-9 7-8 8-9 2 2 1 4 8 5 3 1 5 4 3 Time (months) Construct a PERT network and compute • Critical path and its duration • Total loat for each activity Also, ind the minimum number of cranes the project must have for its activities 2-5, 3-7 and 8-9 without delaying the project. There is than a change required in the PERT network. solution: steps: 1. Moving forward, ind EF times (choosing the Maximum at activity intersection) 2. Maximum EF = LF = Critical Path Time. 3. Return path ind LF (Choosing the Minimum at activity intersection) 4. Note LF, EF from network (except activity intersections) OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 157 Project Management Table: Activity Relationship Activity Duration Es EF ls lF TF 1 -2 2 0 2 5 7 5 1 -3 2 0 2 0 2 0 1 -4 1 0 1 6 7 6 2-5 4 2 6 7 11 5 3-6 8 2 10 2 10 0 3-7 5 2 7 3 8 1 4-6 3 1 4 5 10 6 5-8 1 6 7 11 12 5 6-9 5 10 15 10 15 0 7-8 4 7 11 8 12 1 8-9 3 11 14 12 15 1 Critical path is 1-3-6-9 with duration 15 months 158 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Minimum number of cranes • Finish 3 — 7 at 7 with one crane • Finish 2 — 5 at 7 + 4 =11 with the same crane • Finish 5 — 8 at 11 + 1 = 12 with the same crane • Finish 8 — 9 at 12+ 3=15 with the same crane Therefore, one crane will be suficient if start time of the following activities are: • Activities 2-5 — 7 • Activities 5-8 — 11 • Activities 8-9 — 12 Illustration 4. A project consists of ive activities. Activities P and Q run simultaneously. The relationship among the various activities is as follows: Activity Immediate Successor P R Q S Activity T is the last operation of the project and it is also immediate successor to R and S. Draw the network of the Project. Answer: 2 P R T 1 4 Q 3 5 S OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 159 Project Management 6.3 pERT AND cpM Network Analysis Network analysis is the general name given to certain speciic techniques which can be used for planning, management and control of project. It often acts as a network management tool for breaking down projects into components or individual activities and recording the result on a low chart or network diagram. These results generally reveal information that is used to determine duration, resource limitations and cost estimates associated with the project. It offers insight into what is occurring at each critical point of the network. Project management and eficient resource allocation are two critical aspects of the production and operations managers’ responsibilities. Since a project is non-repetitive and temporal in nature, the mode of management differs from the usual job shop or other related types of scheduling. Network analysis enables us to take a systematic quantitative structural approach to the problem of managing a project through to successful completion. Also, since it has a graphical representation, it can be easily understood and used by those with a less technical background. Network is a graphical representation of all the Activities and Events arranged in a logical and sequential order. Network analysis plays an important role in project management. A project is a combination of interrelated activities all of which must be executed in a certain order for its completion. Activity is the actual performance of the job. This consumes resources (Time, human resources, money, and material. An event refers to start or completion of a job. This does not consume any resources. Applications: • • • • • • Construction of a Residential complex, Commercial complex, Petro-chemical complex Ship building Satellite mission development Installation of a pipe line project etc... The procedure of drawing a network is: 1. specify the Individual Activities: From the work breakdown structure, a listing can be made of all the activities in the project. This listing can be used as the basis for adding sequence and duration information in later steps. 2. Determine the sequence of the Activities: Some activities are dependent on the completion of others. A listing of the immediate predecessors of each activity is useful for constructing the CPM network diagram. 3. Draw the Network Diagram: Once the activities and their sequencing have been deined, the CPM diagram can be drawn. CPM originally was developed as an activity on node (AON) network, but some project planners prefer to specify the activities on the arcs. 4. Estimate Activity completion Time: The time required to complete each activity can be estimated using past experience or the estimates of knowledgeable persons. CPM is a deterministic model that does not take into account variation in the completion time, so only one number is used for an activity’s time estimate. 5. Identify the critical path: The critical path is the longest-duration path through the network. The signiicance of the critical path is that the activities that lie on it cannot be delayed without delaying the project. Because of its impact on the entire project, critical path analysis is an important aspect of project planning. 160 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT The critical path can be identiied by determining the four parameters for each activity. The four parameters are Earliest Start, Earliest Finish, Latest Finish and Latest Start. Rules for drawing the network diagrams. In a network diagram, arrows represent the activities and circles represent the events. • The tail of an arrow represents the start of an activity and the head represent the completion of the activity. • The event numbered 1 denotes the start of the project and is called initial event. • Event carrying the highest number in the network denotes the completion of the project and is called terminal event. • Each deined activity is represented by one and only arrow in the network. • Determine which operation must be completed immediately before other can start. • Determine which other operation must follow the other given operation. • The network should be developed on the basis of logical, analytical and technical dependencies between various activities of the project. The basic network construction – Terminology used. Network representation: There are two types of systems – AoA system (Activity on Arrow system) In this activities are represented by an arrows. AoN system (Activity on Node system) In this method activities are represented in the circles. A project consists of tasks with deinite starting and ultimate ending points and hence a project manager is saddled with the responsibilities of getting job done on schedule within allowable cost and time constraint speciied by the management. Typically all projects can be broken into: separate activities – where each activity has an associated completion time (time from the start of the activity to its inish). precedence relationships – which govern order in which we may perform the activities. The main problem is to bring all these activities together in a coherent fashion to complete the project at a required time. Apart from the traditional method of adding activity durations, these exist two different techniques for network analysis namely the PERT – Program Evaluation and Review Technique and CPM – Critical Path Management. PERT has the ability to cope with uncertainty in activity completion times while CPM emphasized on the trade-off between cost of the project and its overall completion time. The CPM has the advantage of decreasing completion times by probably spending more money. Differences between pERT & cpM pERT cpM 1. It is a technique for planning scheduling & 1. controlling of projects whose activities are subject to uncertainty in the performance time. Hence it is a probabilistic model. It is a technique for planning scheduling & controlling of projects whose activities not subjected to any uncertainty and the performance times are ixed. Hence it is a deterministic model. 2. It is an Event oriented system It is an Activity oriented system 3. Basically does not differentiate critical and non- 3. critical activities. 2. Differentiates clearly the critical activities from the other activities. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 161 Project Management 4. Used in projects where resources (men, materials, 4. money) are always available when required. Used in projects where overall costs is of primarily important. Therefore better utilized resources. 5. Suitable for Research and Development projects 5. where times cannot be predicted. Suitable for civil constructions. Critical Path Analysis and PERT are powerful tools that help you to schedule and manage complex projects. They were developed in the 1950s to control large defense projects, and have been used routinely since then. As with Gantt Charts, Critical Path Analysis (CPA) or the Critical Path Method (CPM) helps you to plan all tasks that must be completed as part of a project. They act as the basis both for preparation of a schedule, and of resource planning. During management of a project, they allow you to monitor achievement of project goals. They help you to see where remedial action needs to be taken to get a project back on course. Within a project it is likely that you will display your inal project plan as a Gantt Chart (using Microsoft Project or other software for projects of medium complexity or an excel spreadsheet for projects of low complexity). The beneit of using CPA within the planning process is to help you develop and test your plan to ensure that it is robust. Critical Path Analysis formally identiies tasks which must be completed on time for the whole project to be completed on time. It also identiies which tasks can be delayed if resource needs to be reallocated to catch up on missed or overrunning tasks. The disadvantage of CPA, if you use it as the technique by which your project plans are communicated and managed against, is that the relation of tasks to time is not as immediately obvious as with Gantt Charts. This can make them more dificult to understand. A further beneit of Critical Path Analysis is that it helps you to identify the minimum length of time needed to complete a project. Where you need to run an accelerated project, it helps you to identify which project steps you should accelerate to complete the project within the available time. Critical Path Analysis (CPA) is a project management tool that: • • • • • Sets out all the individual activities that make up a larger project. Shows the order in which activities have to be undertaken. Shows which activities can only taken place once other activities have been completed. Shows which activities can be undertaken simultaneously, thereby reducing the overall time taken to complete the whole project. Shows when certain resources will be needed – for example, a crane to be hired for a building site. In order to construct a CPA, it is necessary to estimate the elapsed time for each activity – that is the time taken from commencement to completion. Then the CPA is drawn up based on dependencies such as: • • • The availability of labour and other resources Lead times for delivery of materials and other services Seasonal factors – such as dry weather required in a building project Once the CPA is drawn up, it is possible to see the CRITICAL PATH itself – this is a route through the CPA, which has no spare time (called ‘FLOAT’ or ‘slack’) in any of the activities. In other words, if there is any delay to any of the activities on the critical path, the whole project will be delayed unless the irm makes other changes to bring the project back on track. The total time along this critical path is also the minimum time in which the whole project can be completed. Some branches on the CPA may have FLOAT, which means that there is some spare time available for these activities. 162 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT What can a business do if a project is delayed? • Firstly, the CPA is helpful because it shows the likely impact on the whole project if no action were taken. • Secondly, if there is loat elsewhere, it might be possible to switch staff from another activity to help catch up on the delayed activity. • • • • • • As a rule, most projects can be brought back on track by using extra labour – either by hiring additional people or overtime. Note, there will be usually be an extra cost. Alternative suppliers can usually be found – but again, it might cost more to get urgent help. Nodes are numbered to identify each one and show the Earliest Start Time (EST) of the activities that immediately follow the node, and the Latest Finish Time (LFT) of the immediately preceding activities The CPA must begin and end on one ‘node’ – see below There must be no crossing activities in the CPA East activity is labelled with its name eg ‘print brochure’, or it may be given a label, such as ‘D’, below. The activities on the critical path are usually marked with a ‘//’ In the example below • • • • • The Node is number 3 The EST for the following activities is 14 days The LFT for the preceding activities is 16 days There is 2 days’ loat in this case (difference between EST and LFT) The activity that follows the node is labelled ‘D’ and will take 6 days Earliest Start Time Activity 3 14 D 16 6 Elapsed time of activity Latest Finish Time Node no. A simple example – baking a loaf of bread Here is a simple example, in which some activities depend on others having been undertaken in order, whereas others can be done independently. Activity preceded by Elapsed time (minutes) A - Weigh ingredients - 1 B - Mix ingredients A 3 C - Dough rising time B 60 D - Prepare tins - 1 E - Pre-heat oven - 10 C&D 2 F - Knock back dough and place in tins OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 163 Project Management G - 2 nd dough rising time H - Cooking time F 15 E&G 40 D 1 1 0 0 A 1 2 1 1 B 3 3 4 C 4 60 4 64 F 64 2 5 66 G 66 15 6 81 H 81 45 7 126 126 E 10 In this example, there is a clear sequence of events that have to happen in the right order. If any of the events on the critical path is delayed, then the bread will not be ready as soon. However, tasks D (prepare tins) and E (heat the oven) can be started at any time as long as they are done by the latest inish time in the following node. So, we can see that the oven could be switched on as early as time 0, but we can work out that it could be switched on at any time before 71 – any later than this and it won’t be hot enough when the dough is ready for cooking. There is some ‘loat’ available for tasks D and E as neither is on the critical path. This is a fairly simple example, and we can see the LST and LFT are the same in each node. In a more complex CPA, this will not necessarily be the case, and if so, will indicate that there is some ‘loat’ in at least one activity leading to the node. However, nodes on the critical path will always have the same EST and LFT. CPA is a planning and project management tool. Whilst it can help ensure a project is completed as quickly as possible, and resources used as eficiently as possible, it does depend on the accuracy of the information used. Just drawing up a CPA will not in itself ensure a project runs to plan; most projects encounter some delay or something unexpected, so managers need to use tool such as CPA to monitor the project and take swift action to rectify any problems. Drawing a critical path Analysis chart Use the following steps to draw a CPA Chart: step 1. list all activities in the plan For each activity, show the earliest start date, estimated length of time it will take, and whether it is parallel or sequential. If tasks are sequential, show which stage they depend on. Figure 1. Task List: Planning a custom-written computer project Task Dependent on... Earliest start length Type A. High level analysis Week 0 1 week Sequential B. Week 1 1 day Sequential A Week 1.2 2 weeks Parallel B Week 1 2 weeks Sequential A Selection of hardware platform C. Installation and commissioning of hardware D. Detailed analysis of core modules 164 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT E. Detailed analysis of supporting modules Week 3 2 weeks Sequential D F. Programming of core modules Week 3 2 weeks Sequential D G. Programming of supporting modules Week 5 3 weeks Sequential E H. Quality assurance of core modules Week 5 1 week Sequential F I. Quality assurance of supporting modules Week 8 1 week Sequential G J. Core module training Week 6 1 day Parallel C,H K. Development and QA of accounting reporting Week 5 1 week Parallel E L. Development and QA of management reporting Week 5 1 week Parallel E M. Development of Management Information System Week 6 1 week Sequential L N. Detailed training Week 9 1 week Sequential I, J, K, M step 2. plot the activities as a circle and arrow diagram Critical Path Analyses are presented using circle and arrow diagrams. In these, circles show events within the project, such as the start and inish of tasks. The number shown in the left hand half of the circle allows you to identify each one easily. Circles are sometimes known as nodes. An arrow running between two event circles shows the activity needed to complete that task. A description of the task is written underneath the arrow. The length of the task is shown above it. By convention, all arrows run left to right. Arrows are also sometimes called arcs. An example of a very simple diagram is shown below: Figure 2: simple circle and Arrow Diagram A 1 Week B High Level Analysis This shows the start event (circle 1), and the completion of the ‘High Level Analysis’ task (circle 2). The arrow between them shows the activity of carrying out the High Level Analysis. This activity should take 1 week. Where one activity cannot start until another has been completed, we start the arrow for the dependent activity at the completion event circle of the previous activity. An example of this is shown below: Circle and Arrow Diagram showing two activities that cannot be started until the irst activity has been completed. C 1.2 re y a Da rdw 1 Ha t ec el A 0 1 Week High Level Analysis B 1 S 2 Week Core Module Analysis D 3 Here the activities of ‘Select Hardware’ and ‘Core Module Analysis’ cannot be started until ‘High Level Analysis’ has been completed. This diagram also brings out a number of other important points: OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 165 Project Management • Within Critical Path Analysis, we refer to activities by the numbers in the circles at each end. For example, the task ‘Core Module Analysis’ would be called activity 2 to 3. ‘Select Hardware’ would be activity 2 to 9. • Activities are not drawn to scale. In the diagram above, activities are 1 week long, 2 weeks long, and 1 day long. Arrows in this case are all the same length. • In the example above, you can see a second number in the top, right hand quadrant of each circle. This shows the earliest start time for the following activity. It is conventional to start at 0. Here units are whole weeks. A different case is shown below: Circle and Arrow Diagram showing an activity (6 to 7) that cannot start until other activities (11 to 6, 5 to 6, 4 to 6, and 8 to 6) have been completed. 11 le ay du D 1 mo ing e in or tra C 1 Week 5 2 Week 6 QA of supporting modules 7 Detailed Training 1 M p lo De 8 ve W ee k 4 IS k A ee d Q ts 1 W p an epor lo g R ve n De ounti c Ac Here activity 6 to 7 cannot start until the other four activities (11 to 6, 5 to 6, 4 to 6, and 8 to 6) have been completed. Click the link below for the full circle and arrow diagram for the computer project we are using as an example. critical path Analysis for Example computer project 1 Week Install and Commission Hardware 1D a tH y ard wa re lec Se 1 Week 0 0 High Level Analysis 2 6 1 8.8 QA of Core Modules 2 Week 2 Week 1 3 3 1 Core Module Analysis 3 Supporting Module Analysis ay 1 D odule M re ing Co Train 1 1 Week 5 10 7.8 Pro 2 We Co gram eks re mi Mo ng du of les 1.2 9 7.8 4 5 5 2 Week Programming of Supporting Module 5 1 Week 8 8 QA of Supporting Modules 6 9 9 1 Week Detailed Training 7 10 10 1 Week Develop and QA Accounting Reports 1 Week Develop and QA Management Reports 166 8 6 8 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT This shows all the activities that will take place as part of the project. Notice that each event circle also has a igure in the bottom, right hand quadrant. This shows the latest inish time that’s permissible for the preceding activity if the project is to be completed in the minimum time possible. You can calculate this by starting at the last event and working backwards. The latest inish time of the preceding event and the earliest start time of the following even will be the same for circles on the critical path. You can see that event M can start any time between weeks 6 and 8. The timing of this event is not critical. Events 1 to 2, 2 to 3, 3 to 4, 4 to 5, 5 to 6 and 6 to 7 must be started and completed on time if the project is to be completed in 10 weeks. This is the ‘critical path’ – these activities must be very closely managed to ensure that activities are completed on time. If jobs on the critical path slip, immediate action should be taken to get the project back on schedule. Otherwise completion of the whole project will slip. ‘crash Action’ You may ind that you need to complete a project earlier than your Critical Path Analysis says is possible. In this case you need to re-plan your project. You have a number of options and would need to assess the impact of each on the project’s cost, quality and time required to complete it. For example, you could increase resource available for each project activity to bring down time spent on each but the impact of some of this would be insigniicant and a more eficient way of doing this would be to look only at activities on the critical path. As an example, it may be necessary to complete the computer project in Figure 5 in 8 weeks rather than 10 weeks. In this case you could look at using two analysts in activities 2 to 3 and 3 to 4. This would shorten the project by two weeks, but may raise the project cost – doubling resources at any stage may only improve productivity by, say, 50% as additional time may need to be spent getting the team members up to speed on what is required, coordinating tasks split between them, integrating their contributions etc. In some situations, shortening the original critical path of a project can lead to a different series of activities becoming the critical path. For example, if activity 4 to 5 were reduced to 1 week, activities 4 to 8 and 8 to 6 would come onto the critical path. pERT (program Evaluation and Review Technique) PERT is a variation on Critical Path Analysis that takes a slightly more skeptical view of time estimates made for each project stage. To use it, estimate the shortest possible time each activity will take, the most likely length of time, and the longest time that might be taken if the activity takes longer than expected. Use the formula below to calculate the time to use for each project stage: shortest time + 4 x likely time + longest time 6 This helps to bias time estimates away from the unrealistically short time-scales normally assumed. Illustration 5. XYZ Auto-manufacturing company has to prepare a design of its latest model of motorcycle. The various activities to be performed to prepare design are as follows: Activity Description of activity preceding activity A Prepare drawing — B Carry out cost analysis A C Carry out inancial analysis A D Manufacture tools E Prepare bill of material B, C F Receive material D,E C G Order sub-accessories E H Receive sub-accessories G I Manufacture components J Final assembly K Testing and shipment F I,H J Prepare an appropriate network diagram. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 167 Project Management solution: The network diagram will be as follows: Where D1 and D2 are dummy activities. Illustration 6. The following table gives data on normal time & cost and crash time & cost for a project. Activity 1—2 1—3 2—4 2—5 3—4 4—6 5—6 6—7 Normal Crash Time (days) Cost (`) Time (days) Cost (`) 6 4 5 3 6 8 4 3 600 600 500 450 900 800 400 450 4 2 3 1 4 4 2 2 1,000 2,000 1,500 650 2,000 3,000 1,000 800 The indirect cost per day is ` 100. (i) Draw the network and identify the critical path. (ii) What are the normal project duration and associated cost? (iii) Crash the relevant activities systematically and determine the optimum project completion time and cost. solution: (i) The network for normal activity times indicates a project time of 22 weeks with the critical path 1-2-4-6-7. 5 9 15 3 6 1 0 0 2 6 6 4 4 11 11 5 4 8 6 19 19 3 7 22 22 6 3 4 5 168 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (ii) Normal project duration is 22 weeks and the associated cost is as follows: Total cost = Direct normal cost + Indirect cost for 22 weeks. = 4,700 + 100 x 22 = ` 6,900. (iii) For critical activities, crash cost - slope is given below: critical activity crash cost-slop 1-2 1000 - 600 = 200 6-4 2-4 1500 - 500 = 500 5-3 4-6 3000 - 800 = 550 8-4 6-7 800 - 450 = 350 3-2 Of the activities lying on the critical path, activity 1—2 has lowest cost slope Therefore, we shall irst crash this activity by just one day. Duration = 21 days, and cost = 4700 + 1 x 200 + 100 x 21 = ` 7000. Other activities too have become critical. Now we have 2 critical paths: 1→2→3→6→7 and 1→3→4→6→7. To reduce duration of the activity further, we shall have to reduce duration of both the paths. We have following alternatives: Crash activity 6 — 7 by 1 day at a cost of ` 350. Crash activity 4 — 6 by 4 days at the cost of ` 550 per day. Crash activities 1—2 and 1 — 3 by 1 day each at a cost of ` (200 + 700) = ` 900. Crash activities 2 — 4 and 3 — 4 by 2 days each at a cost of ` (500 + 550) = ` 1050/day. Thus, we shall irst crash activities 6 — 7 by 1 day and then activity 4 — 6 by 4 days. On crashing activity 6 — 7 by 1 day, cost = 4900 + 350 x 1 + 100 x 20 = ` 7250, and duration = 20 days. Next we crash 4—6 by 4 days. Cost = 5250 + 550 x 4 + 100 x 16 = ` 9050. Duration = 16 days. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 169 Project Management Next we crash activities 1—2 and 3—4 by 1 day each. Cost = 7450 + 200 x 1 + 550 x 1 + 100 x 15 = ` 9700. Next we crash activities 2 4 and 3 4 by 1 day each. Cost = 8200 + 500 x 1 + 550 x 1 + 100 x 14 = ` 10,650. Duration = 14 days. We crash activities 1—3 and 2—4 by 1 day each. Cost = 9250 + 700 x 1 + 500 x 1 + 100 x 13 = ` 11,750 Duration = 13 days. Now there are three critical paths: 1—2—5—6—7, 1—2—4—6—7, 1—3—4—6—7 Also, no further crashing is possible. Hence minimum duration of the project =13 days with cost ` 11,750 170 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Illustration 7. Draw the network for the following activities and ind critical path and total duration of project. Activity Duration (months) Activity Duration (months) 1-2 2.5 4-5 2.0 2-3 2.5 5-6 3.0 2-4 1.5 6-7 1.5 3-4 1.0 5-7 1.5 3-5 1.0 Answer: Paths Duration 1-2-3-5-6-7 2.5+2.5+1+3+1.5 = 10.5 1-2-3-5-7 2.5+2.5+1+1.5 = 7.50 1-2-3-4-5-6-7 2.5+2.5+1+2+3+1.5 = 12.5 (Critical path) 1-2-3-4-5-7 2.5+2.5+1+2+1.5 = 9.5 1-2-4-5-7 2.5+1.5+2+1.5 = 7.5 1-2-4-5-6-7 2.5+1.5+2+3+1.5 = 10.5 Illustration 8. The following activities must be accomplished in order to complete a construction project: Activity A B C D E F G H I J Time 3 8 4 2 1 7 5 6 8 9 Predecessors — — AB B A C EF DF GH I • Construct a network diagram for this project. Find the CP and the duration of the project. • Assume that you are project manager of the project mentioned above. The project has progressed for 10 weeks and the status is follows: Activities completed: A, B, E. Other activities have not started as yet.  If no managerial action is taken at all when will the project get completed?  What action might you take to get the project back to a schedule that can be completed by the end of week 42? OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 171 Project Management Answer: paths Duration (weeks) paths Duration (weeks) 1-2-7-9-10-11 26 1-3-4-5-6-7-9-10-11 41 1-2-4-5-6-7-9-10-11 36 1-3-4-5-6-8-9-10-11 42 1-2-4-5-6-8-9-10-11 37 1-3-8-9-10-11 33 Critical Path: BCFHIJ. Duration 42 weeks. paths 1-2-3-5-6-7 1-2-3-4-5-6-7 Duration (weeks) 33 34 1-4-5-6-7 critical path: cFHIJ 25 For completing the project as per original schedule, the project activities on the critical path should be reduced by 2 weeks. For example, we may reduce any one of the activities CFHIJ by 2 days or any two activities or one reek each. Illustration 9. Given is the following information regarding a project: Activity A B C D E F G H I J K L Dependence - - - AB B B FC B EH EH CDFJ K Duration 3 4 2 5 1 3 6 4 4 2 1 5 Draw the Network Diagram and identify the Critical Path and Project Duration. 172 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Answer: Network Diagram: Network Table: Activity Duration EsT lsT EFT lFT Total Float Free Float Independent Float (1) (2) (3) (4) (5) (6) (7) (8) (9) A 3 0 2 3 5 2 2 – 1= 1 1–0 =1 b 4 0 0 4 4 0 0 0 C 2 0 8 2 10 8 8–3=5 5 – 0= 5 D1 0 4 5 4 5 1 1–1=0 0 D 5 4 5 9 10 1 1–0=1 1–1=0 E 1 4 7 5 8 3 3–3=0 0 F 3 4 7 7 10 3 3–3=0 0 G 6 7 10 13 16 3 3–0=3 3–3=0 D2 0 5 8 5 8 3 3–0=3 3–3=0 H 4 4 4 8 8 0 0 0 I 4 8 12 12 16 4 4 – 0= 4 4 – 0= 4 J 2 8 8 10 10 0 0 0 D3 0 7 10 7 10 3 3–0=3 3–3=0 k 1 10 10 11 11 0 0 0 l 5 11 16 16 16 0 0 0 critical path is b – H – J – k – l. Expected Duration = 16days The columns are updated in the following order as under: (1) Activity (including Dummies) are listed from the Question and network Diagram (2) Duration (including Dummies) are listed from the Question and Network Diagram (3) EST = E value of LHS/ Tail Event from Diagram. (6) LFT = L value of RHS/ Head Event from Diagram. (5) EFT = EST + Duration as per Column (2). Hence Column (5) = Column (3) + Column (2) (4) LST = LFT - Duration as per Column (2). Hence column (4) = Column (6) – Column (2) (7) Total Float = [LET – EFT] or [LST – EST] = [Col.(6) – Col.(5)] or [Col.(4) – Col.(3)] (8) Free Float = Total Float – Head Event Slack i.e. [Col.(7) – difference between L and E of RHS Event]. Note: If Total Float is Zero, Free Float is also equal to Zero If a negative value is derived, it is restricted to zero. (9) Independent Float = Free Float – Tail Event Slack i.e. [Col (8) – Difference between L and E of LHS Event]. Note: If Free Float is Zero, Independent Float is also equal to Zero. If a negative value is derived, it is restricted to zero. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 173 Project Management Note: • The activities whose Total Float is Zero are Critical Activities. These Total Floats are circled and the respective activities are indicated by double in the network diagram. • Dummy Activities may or may not lie on the critical path. However, in this question, the dummy activities do not fall on the Critical Path. Illustration 10. A project with normal duration and cost along with crash duration and cost for each activity is given below: Activity Normal time (Hrs.) Norman cost (`) 1-2 5 200 2-3 5 30 2-4 9 320 2-5 12 620 3-5 6 150 4-5 0 0 5-6 8 220 6-7 6 300 Overhead cost is ` 50 per hour. Required: Draw network diagram and identify the critical path. crash time (Hrs.) 4 5 7 10 5 0 6 5 crash cost (`) 300 30 480 710 200 0 310 370 Answer: Paths → 1-2-5-6-7 (Let’s denote this by A) 1-2-3-5-6-7 (Let’s denote this by B) 1-2-4-5-6-7 (Let’s denote this by C) Duration 31 hours 30 hours 28 hours The critical path is A. Its duration is 31 hours llustration 11. What are the difference between CPM and PERT. Answer: CPM originated from construction project while PERT evolved from R & D projects. Both CPM and PERT share the same approach for constructing the project network and for determining the critical path of the network. There is some basic differences between PERT and CPM pERT cpM 1. Time estimate is probabilistic with uncertainty in time 1. Time estimate is deterministic with known time duration. Three time estimates. durations. Single time estimate 2. Event oriented 2. Activity oriented 3. Focused on time 3. Focused on time-cost trade off 4. More suitable for new projects 4. More suited for repetitive projects 174 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT study Note - 7 EcoNoMIcs oF MAINTENANcE AND spAREs MANAgEMENT This study Note includes 7.1 break Down Maintenance 7.2 preventive Maintenance 7.3 Routine Maintenance 7.4 Replacement of Machine 7.5 spare parts Managment 7.1 bREAk DoWN MAINTENANcE Here the production facility is run without much routine maintenance until it breakdown. Once the machine breakdown it is taken for repair and inspected to ind out the defects. After identifying the defect, the required repair is planned and the spares are procured to repair the machine. As the breakdowns are random in nature and the machine cannot be used during the repair period, production hours are lost hence the productivity is reduced. Repair maintenance is not a recommended practice, in general, but many a time many organizations prefer this, because they do not want to keep the machine idle for maintenance. But they ignore the fact that the break down repair costs more than the regular maintenance practice. It is however, an economical way of maintaining certain non-critical items whose repair and down time costs are less this way than with any other system of maintenance. 7.2 pREVENTIVE MAINTENANcE A system of scheduled, planned or preventive maintenance tries to minimize the problems of breakdown maintenance. It locates weak parts in all equipments, provides them regular inspection and minor repairs thereby reducing the danger of unanticipated breakdowns. The underlying principle of preventive maintenance is that prevention is better than cure. It involves periodic inspection of equipment and machinery to uncover conditions that lead to production breakdown and harmful depreciation. The system of preventive maintenance varies from plant to plant depending on the requirement of the plant. Any company, adopting the preventive maintenance should keep the record of failure of various components and equipment, which help the maintenance department to statistically analyze the failure pattern and replace the item before it fails, so that the breakdown can be eliminated. This reduces the unanticipated breakdowns, increases the availability of the equipment, maintain optimum productive eficiency of equipment and machinery reduces the work content of maintenance job, increases productivity and safety of life of worker. Production department or maintenance department depending on the size of the plant generally takes up preventive maintenance work. As the preventive maintenance is a costly affair, it is better to maintain records of cost (both labour, materials used and spares used) and a valuation of the work done by the department will show us what beneits are derived from preventive maintenance. The analytical approach to evaluate the work done by preventive maintenance is (i) (Inspections incomplete) / (Inspections scheduled) × 100 should be less than 10% (ii) (Hours worked for maintenance) / (Scheduled hours) × 100 = Performance of the department. (iii) Down time to be given as a ratio of the available hours and to be compared against a standard to be worked out for each company or against a igure of the past. The ratio is given as: OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 175 Economics of Maintenance and Spares Management = Down time in hours/ Available hours = working days × hours per day × number of machines. Here down time is the total time of stoppage of the machine for scheduled and unscheduled maintenance work. (iv) Frequency of break downs = (Number of break downs) / (Available machine hours) (v) Effectiveness of planning = (Labour hours on scheduled maintenance) / (Total labour hours spent on maintenance). OR (Down time due to scheduled maintenance)/(Down time due to total maintenance work) Advantages of preventive maintenance: (i) Reduced breakdowns and downtime, (ii) Greater safety to workers, (iii) Fewer large scale repairs, (iv) Less standby or reserve equipment or spares, (v) Lower unit cost of the product manufactured, (vi) Better product quality, (vii) Increased equipments life and (viii) Better industrial relations. 7.3 RouTINE MAINTENANcE It includes lubrication, cleaning, periodic overhaul; etc. This is done while the equipment is running or during preplanned shut-downs. Running maintenance is the work which can be carried out while the facility is in service. Maintenance Techniques It can be discussed as under: In some cases the loss and inconvenience due to breakdown of equipment is so high that standby equipment is kept. As soon as the original equipment fails, the standby facility is employed to avoid interruption and downtime. Standby machines are often kept to reduce the loss due to the breakdown of a key machine. Breakdown maintenance also requires use of standby machines. The main question here is how many standby machines to keep and for how long. In order to decide this, a cost beneit analysis of standby machines should be made. There are various costs involved in standby machines. First, there is interest cost on capital investment. Secondly, space is needed to keep standby machines. Thirdly, there is depreciation in the value of standby machines. Fourthly, periodic checking and servicing is necessary to keep the standby machines in new condition. The beneits of standby machines consist of protection against a complete shutdown or shut down of operations. It avoids loss of production and, therefore, it is necessary to estimate loss of future failures a table of expected costs and beneits can be prepared. Shifting production during breakdown. Under this method spare capacity is maintained not in the form of standby machines but by allowing rest to running machines at intervals and by rotation. If one machine in a production line requires shutdown, the output is maintained by shifting to under uitilised machines in other lines. For such application, the capacities of different machines must be properly matched. Maintenance organization At least 50 to 60 percent of investment of any organization is spent on Building and Production facilities. Hence, it is worthwhile to give due consideration for effective maintenance of these items. The maintenance department will looks after the upkeep of equipments, buildings and other. For effective contribution of its work, the maintenance department must have proper place in the organization and it must also have a good organizational structure. 176 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT While organizing a maintenance department one must remember that there should be clear division of authority with little or no overlap. Vertical lines of authority and responsibility must be kept as short as possible. Keep the span of control to an extent of 3 to 6 for a manager. The organizational structure should be lexible. The structure should be designed to suit the types of maintenance work involved. Depending on the need, the maintenance activity may be centralized or decentralized. Chief Plant Engineer Works & Service Works & Service Maintenance Workshop Works & Service Works & Service Safety Engineering Maintenance contracts Operation Overhauls Spare Fabrication Electrical Repair shop Maintenance Engineering Planning Maintenance Maintenance Stores & Spares Management Services Break Down Shops Preventive Planning & Drawing Office Outline of a maintenance department of a large company organizing Maintenance Work In order to facilitate proper control of maintenance work; we must enforce three rules as below. Maintenance Request This must be made in writing to a central point in the organization. No work should be carried out without the knowledge and approval of maintenance supervision - if this discipline is not followed by the organization, it leads to wastage of skilled manpower and inability of the maintenance personnel to schedule essential maintenance work. Maintenance stores Non-availability of vital spare parts when required to meet an emergency like breakdown, may lead to excessive shutdown of the plant and equipment. A large number of items or materials are required to be stored and it involves investing valuable funds from the working capital. A proper stores management is essential as a backup service of good maintenance. Records of Maintenance Work Done Paper work for maintenance is crucial for establishing a good maintenance organization and is often neglected. The records of maintenance work carried out from time to time have to be kept equipment wise. History cards or logbooks of all the plants and equipment must be compiled meticulously giving details of materials used, components replaced and time spent by the workforce. Creation and maintaining this database is essential for proper planning and control, which alone will lead to effective and eficient maintenance. To get the full beneits of effective maintenance the following requirement is to be fulilled: (i) Good Supervision and administration of maintenance department, (ii) Good and clear instructions to be given OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 177 Economics of Maintenance and Spares Management to maintenance crew regarding the repair, (iii) Proper control of work in coordination with production department, (iv) Good training should be given to the maintenance personnel, (v) Good scheduled maintenance program should be chalked out, (vi) Proper maintenance record keeping is a must, (vii) There should be adequate stock of spare parts, particularly insurance spares. Maintenance problem The main problem in maintenance analysis is to minimise the overall cost of maintenance without sacriicing the objectives. There are two alternatives before management. One is to repair a machine or equipment only when it breaks down. This will save expense of inspection and replacement of a part before its lifetime ends. The other alternative is to replace the equipment before the expiry of its working life. This will involve cost of periodic shutdown for check up and repairs. However, it will avoid the loss due to sudden failure or breakdown. The two types of cost - cost of premature replacement and cost of breakdown - need to be balanced. The objective is to minimise total maintenance cost and downtime. Economic analysis is helpful in inding a judicious combination of two types of maintenance. The relationship between preventive maintenance time and repair time is also signiicant. Preventive maintenance policy is justiied only when the average downtime and its cost is less than the average time taken to carry out breakdown repairs. If the machine happens to be part of production line, the breakdown of a machine would throw the entire production line out of gear while a preventive maintenance schedule might enable the repair to be performed during a scheduled idle time of the line. 7.4 REplAcEMENT oF MAcHINE Wear and obsolescence are the two main causes for replacement of machinery in every aspect of life. The reduction of wear is therefore a primary concern when designing appliances. Wear and tear due to passage of time and/or normal usage of plant and machinery is an accepted fact. Technological obsolescence is a major danger which business irms face in modern era. With the development of new and better techniques or equipment of performing a particular function, existing equipment and machines become uneconomical. Whenever a irm decides to switch over to new machines or improved product designs, existing machine designs are said to be obsolete. Hence, obsolescence is a major issue in the procurement and installation of machinery and equipment. A machine is technically obsolete when another machine can do the same job more eficiently, with reduced time and also at a lower cost. Technological obsolescence arises due to continuous improvements in the methods and techniques of production and sometime the rate of improvement is so fast that it becomes economical to replace the machinery before its expected life. A machine may be replaced to reduce the running costs of the concerned machine and the new machines productivity will be more. In replacement decisions, the basic problem is to decide whether to replace a machine or equipment at present or at a future date. It is, therefore, necessary to determine whether obsolescence or deterioration has reached the point where the reduction in operating costs expected from replacement justiies the net capital expenditure involved in installing the new machine and disposing of the old one. Any function aimed at brining back or restore an item to its original or acceptable position or to keep it and retain its healthy, workable position is known as Maintenance. objectives of Maintenance: The objectives of maintenance are : (i) To keep all the production facilities and other allied facilities such as building and premises, power supply system, etc in an optimum working condition, (ii) To ensure speciied accuracy to products and time schedule of delivery to customers, (iii) To keep the down time of the machine at minimum, so that the production program is not disturbed, (iv) To keep the production cycle with in the stipulated range, (v) To modify the machine tools to meet the augmented need for production, (vi) To improve productivity of existing machine tools and to avoid sinking of additional capital, (vii) To keep the maintenance cost at a minimum as far as possible, there by keeping the factory Overheads at minimum, (viii) To extend the useful life of plant and machinery, without sacriicing the level of performance. 178 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Illustration 1. A workshop has 20 nos. of identical machines. The failure pattern of the machine is given below:Elapsed time after Maintenance attention (in month) probability of failure 1 0.20 2 0.15 3 0.15 4 0.15 5 0.15 6 0.20 It costs ` 150 to attend a failed machine and rectify the same. Compute the yearly cost of servicing the broken down machines. solution: Expected time before failure. = 0.20×1 + 0.15×2 + 0.15×3 + 0.15×4 + 0.15×5 + 0.15×6 = 3.5 months Therefore number or repair/machine/annum = 12/3.5 Considering 20 machines and ` 150 to attend a failed machine the yearly cost of servicing = 12/3.5 × 20 × 150 = ` 10286. Illustration 2. A Public transport system is experiencing the following number of breakdowns for months over the past 2 years in their new leet of vehicles: Number of breakdowns 0 1 2 3 4 Number of months this occurred 2 8 10 3 1 Each break down costs the irm an average of ` 2,800. For a cost of ` 1,500 per month, preventive maintenance can be carried out to limit the breakdowns to an average of one per month. Which policy is suitable for the irm? solution: Converting the frequencies to a probability distribution and determining the expected cost/month of breakdowns we get: No. of breakdowns Frequency in months Frequency in per cent Expected Value 0 2 0.083 0.000 1 8 0.333 0.333 2 10 0.417 0.834 3 3 0.125 0.375 4 1 0.042 0.168 Total 1.710 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 179 Economics of Maintenance and Spares Management Breakdown cost per month; Expected cost = 1.710 × ` 2800 = ` 4788. Preventive maintenance cost per month: Average cost of one breakdown/month = ` 2, 800 Maintenance contract cost/month = ` 1,500 Total = ` 4,300. Thus, preventive maintenance policy is suitable for the irm. Illustration 3. Indian Electronics, manufactures TV sets and carries out the picture tube testing for 2000 hours. A sample of 100 tubes was put through this quality test during which two tubes failed. If the average usage of TV by the customer is 4 hours/day and if 10,000 TV sets were sold, then in one year how many tubes were expected to fail and what is the mean time between failures for these tubes? solution: The total test time = (100 tubes) × 2000 hours = 200,000 tube-hours. There are two tubes which have failed and hence the total time is to be adjusted for the number of hours lost due to the failures during the testing. 2000 The lost hours are computed as = 2 × = 2000 hours. 2 The assumption is made here is that each of the failed tubes have lasted an average of half of the test period. Therefore, the test shows that there are two failures during (2,00,000 – 2000) = 1,98,000 tube hours of testing. During 365 days a year (four hours a day) for 10,000 tubes the number of expected failures 2 ×10,000 ×365 × 4 = 147.47 =148 tubes approximately. 1,98,000 1,98,000 tubes hrs. of testing Mean time between failures = 2 failure = 99,000 tubes hours per failure = 99,000 = 67.8 tubes year per failure 4 × 365 Illustration 4. A company has 50 identical machines in its facilities. The cost of preventive servicing (Cp) is ` 20, and the cost of repair after breakdown (CR) is ` 100. The company seeks the minimum cost preventive servicing frequency and has collected the data on breakdown probabilities in the following table: probabilities of machine breakdown, by month: Months after servicing that breakdown occurs (i) probability that breakdown will occur (pi) i.pi 1 0.10 0.10 2 0.05 0.10 3 0.05 0.15 4 0.10 0.40 5 0.15 0.75 6 0.15 0.90 7 0.20 1.40 8 0.20 1.60 Total 1.00 5.40 180 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT solution: The mean time before failure is 5.4 months and the expected cost with no preventive maintenance 50 would be 100 x = ` 925.93 per month. The following calculations show Bj, the expected number of breakdowns 5.4 between preventive maintenance intervals, for the possible intervals, that may be considered. B1 = MP1 = 50 (0.10) = 5 B2 = m (P1+ P2) + B1P1= 50(0.10+0.05) + 5(0.10) = 8 B3 = 50 (0.10 + 0.05 + 0.05) + 8 (0.10) + 5 (0.05) = 11.05 Accordingly, B4 = 16.75, B5 = 25.63, B6 = 35.5, B7 = 48.72, B8 = 63.46. The costs of various preventive maintenance intervals are summarised in the table below : Cost of alternative preventive maintenance intervals – Number of months between preventive services (j) (1) 1 bj Expected Number of breakdown in j months Expected cost/ month to Repair breakdown Cr×Bj/j (2) (3) 5.00 500.00 cost per month for preventive service every j month cR(M)/j Total expected cost per month of preventive maintenance and repair (4) (5) 1000.00 1500.00 2 8.00 400.00 500.00 900.00 3 11.05 368.33 333.33 701.66 4 16.75 418.75 250.00 668.75 5 25.63 512.60 200.00 712.60 6 35.50 591.67 166.67 758.34 7 48.72 696.00 142.86 838.86 8 63.46 793.25 125.00 918.25 A policy of performing preventive maintenance every 4 months results in the lowest average cost, about ` 669. This amount is ` 257 per month less than the ` 926 expected cost without preventive maintenance. This policy would reduce the costs by (257 ÷ 926) × 100 = 27.75% below the cost of repairing the machines only when they breakdown. 7.5 spARE pARTs MANAgEMENT In manufacturing plants that own a huge number of equipment, supervising the spare parts correctly and in a timely manner is a dificult task. Usually, spare parts are categorized into two main groups • fast moving • slow moving parts. Fast moving spares are those that are usualy required, and slow moving spares are those that are hardly ever required. The managers come across in dificulties to keep track of the spare parts used and determine future demand manually. The main objective of this project is to create a database management system that will help the managers with the process of super vising spare parts. The system should do the following to keep track. (a) keep record of the spare parts required for a particular type of maintenance; (b) keep record of the spare parts received and used in the past; (c) schedule forthcoming major maintenance services; (d) keep record of spare parts vendors; (e) forecast future demand for fast moving spare parts based on past consumptions; etc. Preventive maintainance is very important but failure cannot be able to eliminated. To avoid failures spare parts play a vital role. Failure statistics are usefull in calculatingspare parts for preventive maintainance and breakdown maintainance also. Spares can be classiied as per sevice level/understocking cost. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 181 Economics of Maintenance and Spares Management • • Regular spares The spare parts required regularly and in substantial number.Both reliabilty and per unit cost of these items are less. Service level = Ku/Ku + Ko, Ku = Oppertunity cost of understock of one unit Ko = Opertunity cost of overstock of one unit. Insurance spares An insurance spare is a spare part that you hold in your spare parts inventory, that you would not expect to use in the, normal life of the plant and equipment but if not available when needed it would result in signiicant losses. • capital spares capital spares are spare parts which, although acknowledged to have a long life or a small chance of failure, would cause a long shutdown of equipment because it would take along time to get a replacement for them. ∑ • i=0 N−1 Pi ≤ C3 − C / C3 ≤ ∑ Pi Rotable spares Rotable items are generally thought of as items of plant or assets that periodically are changed out for repair or overall. The management of rotable items and repairable spare parts is different to the management of other inventory items and proper control requires greater cooperation between maintenance and stores/inventory management. The successful management of these items is far more active than other spare parts as maintenance and store/inventory personnel must work together to ensure that there is visibility of the status of items. Illustration 5. Compute the requirement of spares for breakdown maintenance for an item that exhibits a Poissonian behavior for failure rates with a mean breakdown rate of ive items per month. If the lead time for procuring these spares is one month and a service level of 90 per cent is to be used, what buffer stock of these items should be maintained? (A ixed re-order quantity system of inventory is being used). solution: Buffer stock is required to cover the lead time only, i.e. to cover one month’s period. Mean consumption rate, = 5 per month Referring to the Poisson distribution table for a = 5, we have for x = 7. ... Cumulative probability = 0.867 x = 8 ... Cumulative probability = 0.932 Thus, with seven items only 86.7 per cent service level is attained; with eight items 93.2 per cent service level is obtained. Since one would err on the higher side of the service level, the value of x = 8 is chosen. This means, the amount of spares stock that has to be kept must correspond to a maximum demand rate Dmax of eight during the lead time. In other words we should keep a Buffer Stock = Dmax - Daverage during a lead time = 8 - 5 = 3 items. Thus, buffer stock desired is three numbers of the given spare part. Illustration 6. The main shaft of an equipment has a very high reliability of 0.990. The equipment comes from Russia and has a high downtime cost associated with the failure of this shaft. This is estimated at ` 2 crore as the costs of sales lost and other relevant costs. However, this spare is quoted at ` 10 lakh at present. Should the shaft spare be procured along with the equipment and kept or not? solution: The expected cost of down-time = (Probability of failure) × (Cost when break-down occurs) = (1 - 0.990) × (` 2 crore) = ` 2 lakh However, the cost of procuring the spare now is ` 10 lakh. Therefore, expected cost of downtime is less than the cost of spare; hence the spare need not be bought along with the equipment. 182 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT soME MoRE EXAMplE: Illustration 7. A company has 50 identical machines in its facilities. The cost of preventive servicing (Cp) is `20 and the cost of repair after breakdown (CR) is `100. The company seeks the minimum cost preventive servicing frequency and has located the data on breakdown probabilities in the following table: Probabilities of machine breakdown, by month: Months after servicing that breakdown occurs (i) Probability that breakdown will occur (Pi) i.Pi 1 0.10 0.10 2 0.05 0.10 3 0.05 0.15 4 0.10 0.40 5 0.15 0.75 6 0.15 0.90 7 0.20 1.40 8 0.20 1.60 1.00 5.40 Answer: The mean time before failure is 5.4 months and the expected cost with no preventive maintenance would be 100 × = `925.93 per month. The following calculations show Bj, the expected number of breakdowns between preventive maintenance intervals, for the possible intervals, that may be considered. B1 = MP2 = 50 (0.10) = 5 B2 = m (P1 + P2) + B1P1 = 50(0.10 + 0.05) + 5(0.10) = 8 B3 = 50(0.10 + 0.05 + 0.05) + 8 (0.10) + 5 (0.05) = 11.05 Accordingly, B4 = 16.75, B5 = 25.63, B6 = 35.5, B7 = 48.72, B8 = 63.46. The costs of various preventive maintenance intervals are summarized in the total below: cost of alternative preventive maintenance intervals Number of months bj Expected Number of breakdown in j between preventive services (j) months Expected cost/ month to Repair breakdown cR/bj/j cost per month for Total expected cost per month of preventive preventive service maintenance and every j month cR(M)/j repair (1) (2) (3) (4) (5) 1 5.00 500.00 1000.00 1500.00 2 8.00 400.00 500.00 900.00 3 11.05 368.33 333.00 701.66 4 16.75 418.75 250.00 668.75 5 25.63 512.60 200.00 712.60 6 35.50 591.67 166.67 758.34 7 48.72 696.00 142.86 838.86 8 63.46 793.25 125.00 918.25 A policy of performing preventive maintenance every 4 months results in the lowest average cost, about ` 669. This amount is ` 257 per month less than the `926 expected cost without preventive maintenance. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 183 Economics of Maintenance and Spares Management This policy would reduce the costs by (257 ÷ 926) × 100 = 27.75% below the cost of repairing the machines only when they breakdown. Illustration 8. A irm is using a machine whose purchase price is ` 15,000. The installation charges amount to ` 3,500 and the machine has a scrap value of only ` 1,500 because the irm has a monopoly of this type of work. The maintenance cost in various years is given in the following table: Year Maintenance Cost (`) 1 2 3 4 5 6 7 8 9 260 760 1100 1600 2200 3000 4100 4900 6100 The irm wants to determine after how many years should the machine be replaced on economic considerations, assuming that the machine replacement can be done only at the year end. Answer: Cost of machine, C = ` 15,000 + ` 3,500 = ` 18,500 Scrap value, S = ` 1,500. year Maintenance cost, M1 (`) cumulative Maintenance Cost, ΣM1 (`) c–s (`) Total cost T(n) (`) Annual cost A(n) (`) (i) (ii) (iii) (iv) (v)= (iii)+(iv) (vi)=(v)/n 1 260 260 17,000 17,260 17,260 2 760 1,020 17,000 18,020 9,010 3 1,100 2,120 17,000 19,120 6,373 4 1,600 3,720 17,000 20,720 5,180 5 2,200 5,920 17,000 22,920 4,584 6 3,000 8,920 17,000 25,920 4,320 7 4,100 13,020 17,000 30,020 4,288* 8 4,900 17,920 17,000 34,920 4,365 9 6,100 24,020 17,000 41,020 4,557 Lowest average cost is `4,288 approx., which corresponds to n = 7 in above table. Thus machine needs to be replaced every 7th year. Illustration 9. A large computer installation contains 2,000 components of identical nature which are subject to failure as per probability distribution that follows: Month End: 1 2 3 4 5 % Failure to date: 10 25 50 80 100 Components which fail have to be replaced for eficient functioning of the system. If they are replaced as and when failures occur, the cost of replacement per unit is `3. Alternatively, if all components are replaced in one lot at periodical intervals and individually replace only such failures as occur between group replacement, the cost of component replaced is ` 1. (a) Assess which policy of replacement would be economical. (b) If group replacement is economical at current costs, then assess at what cost of individual replacement would group replacement be uneconomical. 184 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (c) How high can the cost per unit in-group replacement be to make a preference for individual replacement policy? solution: (a) computation of failures & Mean life Month probability p 1X 1 1 0.10 0.10 2 0.15 0.30 3 0.25 0.75 4 0.30 1.20 5 0.20 1.00 3.35 Average No. of Replacements = 2000/3.35 = 597 Cost of Individual Replacement = 597 x 3 = 1791 computation of expected No. of Replacements: Month 0 N0 = N0P0 = 2000 0 1 N1 = N0P1 = 2000 x 0.1 200 2 N2 = N0P2 + N1P1 = 2000 x 0.15 + 200 x 0.1 320 3 N3 = N0P3 + N1P2 + N2P1 = 2000 x 0.25 + 200 x 0.15 + 320 x 0.1 562 4 N4 = N0P4 + N1P3 + N2P2 + N3P1 = 2000 x 0.3 + 200 x 0.25 + 320 x 0.15 + 562 x 0.1 754.2 5 N5 = N0P5 + N1P4 + N2P3 + N3P2 + N4P1 = 2000 x 0.2 + 200 x 0.3 + 320 x 0.25 + 562 x 0.15 + 754.2 x 0.1 699.72 computation of Average cost Month Individual Replacement cost IR gR Total cost Average cost ` ` ` ` 1 200 600 2000 2600 2600 2 520 1560 2000 3560 1780 3 1082 3246 2000 5246 1748.67* 4 1836.2 5508.6 2000 7508.6 1877.15 5 2535.92 7607.76 2000 9607.76 1921.55 Since the average cost is lowest in 3rd month, the optimal interval i.e. replacement is 3 months. Also the average cost is less than ` 1791 of individual replacement, the group replacement policy is better. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 185 Economics of Maintenance and Spares Management (b) let ‘k’ be the cost of Individual Replacement Month Average cost of group Replacement Average cost of IR ‘k’ Value (Rs.) 1 1 (2000 + 200 K) 597 K 5.04 2 0.5 (2000 + 520 K) 597 K 2.97 3 0.33 (2000 + 1082 K) 597 K 2.82 4 0.25 (2000 + 1836.2 K) 597 K 3.62 5 0.20 (2000 + 2535.92 K) 597 K 4.45 If group replacement is anything smaller than 2.82, then Group Replacement would be uneconomical. (c) Let ‘a’ be the unit cost of Group Replacement Policy Month ‘a’ Value (Rs.) 1 1 (2000 a + 600) 1791 0.60 2 0.5 (2000 a + 1560) 1791 1.01 3 0.33 (2000 a + 3246) 1791 1.06 4 0.25 (2000 a + 5508.6) 1791 0.83 5 0.20 (2000 a + 7607.76) 1791 0.67 When unit cost is more than ` 1.06 then Individual Replacement policy would be better. Illustration 10. An electric company which generates and distributes electricity conducted a study on the life of poles. The repatriate life data are given in the following table: Life data of electric poles Year after installation: 1 2 3 4 5 6 7 8 9 10 Percentage poles failing: 1 2 3 5 7 12 20 30 16 4 • If the company now installs 5,000 poles and follows a policy of replacing poles only when they fail, how many poles are expected to be replaced each year during the next ten years? To simplify the computation assume that failures occur and replacements are made only at the end of a year. • If the cost of replacing individually is ` 160 per pole and if we have a common group replacement policy it costs ` 80 per pole, ind out the optimal period for group replacement. Answer: Chart showing Optimal Replacement Period Average life of the pole - 1× 0.01 + 2 × 0.02 + 3 × 0.03 + 4 × 0.05 + 5 × 0.07 + 6 × 0.12 + 7 × 0.20 + 8 × 0.3 + 9 × 0.16 + 10 × 0.04 = 7.05 5000 No. of poles to be replaced every year = = 709 7.05 Average yearly cost on individual replacement = 709 × `160 = ` 1,13,440. 186 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Group Replacement: Initial Cost = 5,000 × `80 = `4,00,000. Year No. of poles to be replaced Yearly cost (`) Cumulative Cost (`) Total cost (`) Average Annual Cost (`) 1 5,000 x 0.01 = 50 8,000 8,000 4,08,000 4,08,000 2 5,000 × 0.02 + 50 × .01 = 101 16,160 24,160 4,24,160 2,12,080 3 5,000 × 0.03 + 50 × 0.02 + 101 × 0.01 = 152 24,320 48,480 4,48,480 1,49,493 4 5,000 × 0.05 + 50 × 0.03 + 101 × 0.02 + 152 × 0.01 = 256 40,960 89,440 4,89,440 1,22,360 5 5,000 × 0.07 + 50 × 0.05 + 101 × 0.03 + 152 × 0.02 + 256 × 0.01 = 362 57,920 1,47,360 5,47,360 1,09,472 6 5,000 × 1.2 + 50 × 0.07 + 101 × 0.05 + 152 × 0.03 + 256 × 0.02 + 362 × 0.01 = 6023 9,63,680 11,11,040 15,11,040 2,51,840 Optimal replacement at the end of the 5th year. Illustration 11. Product A has a Mean Time Between Failures (MTBF) of 30 hours and has a Mean Time To Repairs (MTTR) of 5 hours. Product B has a MTBF of 40 hours and has a MTTR of 2 hours. (i) Which product has the higher reliability? (ii) Which product has greater maintainability? (iii) Which product has greater availability? Answer: (i) Product B, with higher MTBF (i.e. 40 hours) than Product A (i.e. 30 hours), is more reliable since it has lesser chance failure during servicing. (ii) By MTTR we mean the time taken to repair a machine and put it into operation. Thus Product B, with lesser MTTR (i.e., 2 hours) than Product A (i.e., 5 hours), has greater maintainability. (iii) Availability of a machine/product = MTBF MTBF + MTTR Therefore, Availability of Product A = 30/ (30+5) = 30/35 = 85.714% Availability of Product B = 40/(40+2) = 40/42 = 95.238% Hence, Product B has more availability. Illustration 12. Maharashtra Trucking Company (MTC) has a leet of 50 trucks. The past data on the breakdown of the trucks show the following probability distribution (for a new truck as well as for one which has been repaired after a breakdown). Months after Maintenance Probability of Breakdown 1 0.10 2 0.20 3 0.30 4 0.40 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 187 Economics of Maintenance and Spares Management Each breakdown costs ` 3,000 on an average; which includes cost of time lost and cost of materials and manpower. The manager of MTC knows the importance of preventive maintenance. He estimates the costs of the preventive maintenance to be ` 500 per such preventive action. What should be the appropriate maintenance policy in terms of the mix of preventive and breakdown maintenance Answer: First, let us compute the cost of a totally breakdown maintenance policy. The expected number of months between failures = 0.1 (1) + 0.2 (2) + 0.3 (3) + 0.4 (4) = 3.0 Cost per month of totally breakdown maintenance policy = = (No. of trucks) (Cost per breakdown) (Expected number of months between failure) (50)(` 3000) = ` 50,000 (3.0) Now let us compute the costs of different periodicities of preventive maintenance. (i) preventive maintenance (pM) period one month No. of breakdowns within the period of one month: B1= (50) × (0.1) = 5 Cost of breakdown = 5 × ` 3000 = ` 15,000 Cost of preventive maintenance = ` 500 × 50 = ` 25,000 Total Cost during the PM period = ` 40,000 Therefore, cost per month for this policy is = 40,000 ÷ 1 = ` 40,000 (ii) preventive maintenance (pM) period two months No. of breakdowns within 2 months: B2 = (50) × (0.1 + 0.2) + (50) x (0.1) × (0.1) = 15.5 Cost of breakdown = (15.5) × ` 3000 = ` 46,500 Cost of prev. maintenance = ` 500 × 50 = ` 25,000 Total cost during the PM period = ` 71,500 Therefore, cost per month for this policy: ` 71,500 ÷ 2 months = ` 35,750 (iii) preventive maintenance period 3 months No. of breakdowns within 3 months: B3 = (50)× (0.1 + 0.2 + 0.3) + (50 × 0.1) (0.1 + 0.2) + (50 × 0.1 × 0.1) (0.1) = 30 + 1.5 + 0.05 = 31.55 188 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Cost of breakdown = 31.55 x ` 3000 = ` 94,650 Cost of preventive maintenance = 50 x ` 500 = ` 25,000 Total = ` 1,19,650 Therefore, cost per month for this policy = ` 1,19,650 ÷ 3 months = ` 39,883.33 (iv) preventive maintenance period 4 months No. of breakdowns within 4 months B4 = [(50) × (1.0)] + [(50) × (0.1) × (0.1 + 0.2 + 0.3) + (50× 0.1 × 0.1) × (0.1 + 0.2) + (50 × 0.1 × 0.1 × 0.1) × (0.1) + (50 × 0.1 × 0.2) × (0.1)]+ [(50 × 0.2) × (0.1 + 0.2) + (50 × 0.2 × 0.1) × (0.1)] + [(50 × 0.3 × (0.1)] = 57.855 Cost of breakdown = (57.855) x (` 3,000) = ` 1,73,565 Cost of preventive maintenance = 50 x ` 500 = ` 25,000 Total = ` 1,98,565 Therefore, cost per month for this policy is ` 1,98,565 ÷ 4 months = ` 49,641.25 Comparing the costs per month of different policies, we see that the policy of preventive maintenance every two months is the most economic policy. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 189 Operations Management – Objective Type Questions and Answers obJEcTIVE TypE QuEsTIoNs & ANsWERs choosing of correct Answers: 1. Number of product varieties that can be manufactured in Job production is: (a) Limited to one or two, (b) Large varieties of products, (c) One only, (d) None of the above. Ans. (b) 2. Number of product varieties that can be manufactured in Mass production is: (a) One only, (b) Two only, (c) Few varities in large volumes, (d) Large varities in small volumes. Ans. (c) 3. In general number of product varities that can be manufactured in Flow production is: (a) One only, (b) Ten to twenty varities, (c) Large varities, (d) Five only. Ans. (a) 4. Generally the size of the order for production in Job production is: (a) Small, (b) Large, (c) Medium, (d) Very large. Ans. (a) 5. Generally in continuous production the production is carried out to: (a) Customer’s order, (b) Government orders only, (c) For stock and supply, (d) Few rich customers. Ans. (c) 6. Inventory cost per product in intermittent production is: (a) Higher, (b) Lowest, (c) Medium, (c) Abnormal. Ans. (a) 7. The material handling cost per unit of product in Continuous production is: (a) Highest compared to other systems, (b) Lower than other systems, (c) Negligible, (d) Cannot say. Ans. (b) 8. Routing and Scheduling becomes relatively complicated in (a) Job production, (b) Batch production, (c) Flow production, (d) Mass production. Ans. (b) 9. The starting point of Production cycle is: (a) Product design, (b) Production Planning, (c) Routing, (d) Market research. Ans. (d) 10. Variety reduction is generally known as: (a) Less varities, (b) Simpliication, (c) Reduced varities, (d) None of the above. Ans. (b) 11. Preferred numbers are used to: (a) To determine the number of varities that are to be manufactured, (b) To the test the design of the product, (c) To ascertain the quality level of the product, (d) To evaluate the production cost. Ans. (a) 190 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 12. The act of assessing the future and make provisions for it is known as (a) Planning, (b) Forecasting, (c) Assessment, (d) Scheduling. Ans. (b) 13. For a marketing manager, the sales forecast is: (a) Estimate of the amount of unit sales or a speciied future period, (b) Arranging the sales men to different segments of the market, (c) To distribute the goods through transport to satisfy the market demand, (d) To plan the sales methods. Ans. (a) 14. The time horizon selected for forecasting depends on: (a) The salability of the product, (b) The selling capacity of Salesman, (c) Purpose for which forecast is made, (d) Time required for production cycle. Ans. (c) 15. For production planning: (a) Shot term forecasting is useful, (b) Medium term forecasting is useful, (c) Long term forecasting is useful, (d) Forecasting is not useful. Ans. (a) 16. In general, medium range forecasting period will be approximately: (a) 5 to 10 Years, (b) 2 to 3 days, (c) 3 to 6 months, (d) 10 to 20 years. Ans. (c) 17. The range of Long range forecasting period may be approximately: (a) 1 to 2 weeks, (b) 2 to 3 months, (c) 1 year, (d) above 5 years. Ans. (d) 18. To plan for future man power requirement: (a) Short term forecasting is used, (b) Long range forecasting is used, (c) Medium range forecasting is used, (d) There is no need to use forecasting, as future is uncertain. Ans. (b) 19. Long range forecasting is useful in: (a) Plan for Research and Development, (b) To Schedule jobs in Job production, (c) In purchasing the material to meet the present production demand, (d) To assess manpower required in the coming month. Ans. (a) 20. Medium range forecasting is useful in: (a) To assess the loading capacity of the machine, (b) To purchase a materials for next month, (c) To plan for-capacity adjustments, (d) To decide whether to receive production orders or not. Ans. (c) 21. To decide work load for men and machines: (a) Medium range forecasting is used, (b) Short term forecasting is used, (c) Long range forecasting is used, (d) A combination of long range and medium range forecasting is used. Ans. (b) OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 191 Operations Management – Objective Type Questions and Answers 22. Important factor in forecasting production is: (a) Environmental changes, (b) Available capacity of machines, (c) Disposable income of the consumer, (d) Changes in the preference of the consumer. Ans. (b) 23. Application of technology or process to the raw material to add use value is known as: (a) Product, (b) Production, (c) Application of technology, (d) Combination of technology and process. Ans. (b) 24. In Production by disintegration the material undergoes: (a) Change in economic value only, (b) Change in physical and chemical characteristics, (c) Change in technology only, (d) None of the above. Ans. (b) 25. In Production by service, the product undergoes the changes in: (a) Shape and size of the surface, (b) Shape of the surface only, (c) Size of the surface only, (d) Chemical and Mechanical properties. Ans. (d) 26. Use of any process or procedure designed to transform a set of input elements into a set of output elements is known as: (a) Transformation process, (b) Transformation of input to output, (c) Production, (d) Technology change. Ans. (c) 27. Conversion of inputs into outputs is known as: (a) Application of technology, (b) Operations management, (c) Manufacturing products, (d) Product. Ans. (b) 28. The desired objective of Production and Operations Management is: (a) Use cheap machinery to produce, (b) To train unskilled workers to manufacture goods perfectly, (c) Optimal utilisation of available resources, (d) To earn good proits. Ans. (c) 29. The scope of Production Planning and Control is: (a) Limited to Production of products only, (b) Limited to production of services only, (c) Limited to production of services and products only, (d) Unlimited, can be applied to any type of activity. Ans. (d) 30. Manufacturing system often produces: (a) Standardised products, (b) Standardised products in large volumes, (c) Substandardproducts in large volumes, (d) Products and services in limited volume. Ans. (a) 31. The difference between product system and project system is: (a) Project system the equipment and machinery are ixed where as in product system they are movable, (b) In Product system the machinery and equipment are ixed and in project system they are not ixed, (c) Project system produces only standardized products and product system produces only unstandardised products, (d) Products cannot be stocked whereas projects can be stocked. Ans. (b) 192 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 32. Most important beneit to the consumer from eficient production system is: (a) He can save money, (b) He will have product of his choice easily available, (c) He gets increased use value in the product, (d) He can get the product on credit. Ans. (c) 33. Two important functions that are to be done by Production department are: (a) Forecasting, (b) Costing, (c) Scheduling and loading, (d) Inspecting. Ans. (c) 34. Fixing the low lines of materials in production is known as: (a) Scheduling, (b) Loading, (c) Planning, (d) Routing. Ans. (d) 35. The act of releasing the production documents to the production department is known as: (a) Planning, (b) Routing, (c) Dispatching, (d) Releasing. Ans. (c) 36. The activity of specifying when to start the job and when to end the job is known as: (a) Plaining, (b) Scheduling, (c) Timing, (d) Follow-up. Ans. (b) 37. In an organisation the production planning and control department comes under: (a) Planning department, (b) Manufacturing department, (c) Personal department, (d) R & D department. Ans. (b) 38. In Job production system, we need: (a) More unskilled labours, (b) Skilled labours, (c) Semi-skilled labours, (d) Old people. Ans. (b) 39. In Continuous manufacturing system, we need: (a) General purpose machines and Skilled labours, (b) Special machine tools and highly skilled labours, (c) Semi automatic machines and unskilled labours, (d) General purpose machines and unskilled labours. Ans. (b) 40. Most suitable layout for Job production is: (a) Line layout, (b) Matrix layout, (c) Process layout, (d) Product layout. Ans. (c) 41. Most suitable layout for Continuous production is: (a) Line layout, (b) Process Layout, (c) Group technology, (d) Matrix layout. Ans. (a) 42. One of the product examples for Line layout is: (a) Repair workshop, (b) Welding shop, (c) Engineering College, (d) Cement. Ans. (d) 43. The act of going round the production shop to note down the progress of work and feedback the information is known as: (a) Follow up, (b) Dispatching, (c) Routing, (d) Trip card. Ans. (a) OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 193 Operations Management – Objective Type Questions and Answers 44. Line of Best it is another name given to: (a) Method of Least Squares, (b) Moving average method, (c) Semi average method, (d) Trend line method. Ans. (a) 45. One of the important basic objectives of Inventory management is: (a) To calculate EOQ for all materials in the organisation, (b) To go in person to the market and purchase the materials, (c) To employ the available capital eficiently so as to yield maximum results, (d) Once materials are issued to the departments, personally check how they are used. Ans. (c) 46. The best way of improving the productivity of capital is: (a) Purchase automatic machines, (b) Effective Labour control, (c) To use good inancial management, (d) Productivity of capital is to be increased through effective materials management. Ans. (d) 47. MRP stands for: (a) Material Requirement Planning, (b) Material Reordering Planning, (c) Material Requisition Procedure, (d) Material Recording Procedure. Ans. (a) 48. JIT stands for: (a) Just in time purchase, (b) Just in time production, (c) Just in time use of materials, (d) Just in time order the material. Ans. (b) 49. The cycle time, selected in balancing a line must be: (a) Must be greater than the smallest time element given in the problem, (b) Must be less than the highest time element given in the problem, (c) Must be slightly greater than the highest time element given in the problem, (d) Left to the choice of the problem solver. Ans. (c) 50. The lead-time is the time: (a) To placeholders for materials, (b) Time of receiving materials, (c) Time between receipt of material and using materials, (d) Time between placing the order and receiving the materials. Ans. (d) 51. Production planning deals with: (a) What production facilities is required and how these facilities should be laid out in space available, (b) What to produce and when to produce and where to sell, (c) What should be the demand for the product in future? (d) What is the life of the product? Ans. (a) 52. The irst stage in production planning is: (a) Process Planning, (b) Factory Planning, (c) Operation Planning, (d) Layout planning. Ans. (b) 53. In Process Planning we plan: (a) Different machines required, (b) Different operations required, (c) We plan the low of material in each department, (d) We design the product. Ans. (c) 194 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 54. In Operation Planning: (a) The planner plans each operation to be done at work centers and the sequence of operations, (b) Decide the tools to be used to perform the operations, (c) Decide the machine to be used to perform the operation, (d) Decide the materials to be used to produce the product. Ans. (a) 55. Before thinking of routing, the production planner has to: (a) Decide the optimal allocation of available resources, (b) To decide what type of labour to be used, (c) To decide how much of material is required, (d) To count how many orders he has on his hand. Ans. (a) 56. The quantities for which the planner has to prepare production plan are known as: (a) Optimal quantity of products, (b) Material planning, (c) Quantity planning, (d) Planning quantity standards. Ans. (d) 57. The document, which is used to show planning quantity standards and production plan, is known as: (a) Planning speciications, (b) Route sheet, (c) Bill of materials, (d) Operation sheet. Ans. (a) 58. In route sheet or operation layout, one has to show: (a) A list of Materials to be used, (b) A list of machine tools to be used, (c) Every work center and the operation to be done at that work center, (d) The cost of product. Ans. (c) 59. The cycle time in selected in balancing a line must be: (a) Must be greater than the smallest time element given in the problem, (b) Must be less than the highest time element given in the problem, (c) Must be slightly greater than the highest time element given in the problem, (d) Left to the choice of the problem solver. Ans. (c) 60. In solving a problem on LOB, the number of workstations required is given by: (a) Cycle time/Total time, (b) Cycle time/Element time, (c) Total time/Element time, (d) Total time/ Cycle time. Ans. (d) 61. (Total station time/Cycle time × Number of work stations) × 100 is know as: (a) Line Eficiency, (b) Line smoothness, (c) Balance delay of line, (d) Station eficiency. Ans. (a) 62. Final stage of production planning, where production activities are coordinated and projected on a time scale is known as: (a) Scheduling, (b) Loading, (c) Expediting, (d) Routing. Ans. (a) 63. Scheduling shows: (a) Total cost of production, (b) Total material cost, (c) Which resource should do which job and when, (d ) The low line of materials. Ans. (c) OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 195 Operations Management – Objective Type Questions and Answers 64. Scheduling deals with: (a) Number of jobs to be done on a machine, (b) Number of machine tools used to do a job, (c) Different materials used in the product, (d) Fixing up starting and inishing times of each operation in doing a job. Ans. (d) 65. The study of relationship between the load on hand and capacity of the work centers is known as: (a) Scheduling, (b) Loading, (c) Routing, (d) Controlling. Ans. (b) 66. One of the aims of loading is: (a) To inish the job as early as possible, (b) To minimise the material utilisation, (c) To improve the quality of product, (d ) To keep operator idle time, material waiting time and ancillary machine time at minimum. Ans. (d) 67. One of the principles of Scheduling is: (a) Principle of optimal product design, (b) Principle of selection of best material, (c) Principle of optimal operation sequence, (d) Principle of optimal cost. Ans. (c) 68. The method used in scheduling a project is: (a) A schedule of breakdown of orders, (b) Outline Master Programme, (c) PERT & CPM, (d) Schedule for large and integrated work. Ans. (c) 69. Production planning in the intermediate range of time is termed as: (a) Production planning, (b) Long range production planning, (c) Scheduling, (d) Aggregate planning. Ans. (d) 70. One of the requirements of Aggregate Planning is: (a) Both output and sales should be expressed in a logical overall unit of measuring, (b) Appropriate time period, (c) List of all resources available, (d) List of operations required. Ans. (a) 71. In aggregate planning, one of the methods in modiication of demand is: (a) Differential Pricing, (b) Lay off of employees, (c) Over time working, (d) Sub contracting. Ans. (a) 72. In aggregate planning one of the methods used to modiication of supply is: (a) Advertising and sales promotion, (b) Development of complimentary products, (c) Backlogging, (d) Hiring and lay off of employees depending on the situation. Ans. (d) 73. The irst stage of Production control is: (a) Dispatching, (b) Scheduling, (c) Routing, (d) Triggering of production operations and observing the progress and record the deviation. Ans. (d) 196 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 74. The act of releasing the production documents to (a) Routing, (b) Scheduling, (c) Expediting, (d) Dispatching. production department is known as: Ans. (d) 75. One of the important production documents is: (a) Design sheet of the product, (b) List of materials, (c) Route card, (d) Control chart. Ans. (c) 76. One of the important charts used in Programme control is: (a) Material chart, (b) Gantt chart, (c) Route chart, (d) Inspection chart. Ans. (b) 77. The way in which we can assess the eficiency of the production plant is by: (a) Eficient dispatching, (b) By manufacturing a good product, (c) By comparing the actual performance with targets speciied in the speciied programme, (d) By eficient production planning. Ans. (c) 78. Production control concerned with: (a) Passive assessment of plant performance, (b) Strict control on labours, (c) Good materials management, (d) Good product design. Ans. (a) 79. When work centers are used in optimal sequence to do the jobs, we can: (a) Minimise the set up time, (b) Minimse operation time, (c) Minimise the break down of machines, (d) Minimise the utility of facility. Ans. (a) 80. The act of going round the production shop to note down the progress of work and feedback the information is known as: (a) Follow up, (b) Dispatching, (c) Routing, (d) Trip card. Ans. (a) 81. One of the activities of expediting is: (a) To ile the orders in sequence, (b) To decide the sequence of operation, (c) To record the actual production against the scheduled production, (d) To examine the tools used in production. Ans. (c) 82. ‘Z’ chart is a chart used in: (a) Programme control, (b) Job control, (c) Cost control,(d) Quality control. Ans. (a) 83. Z-chart can be used to show: (a) Process used in production, (b) Quality level of the product, (c) Both the plan and the performance, and deviation from the plan, (d) To show cost structure of the product. Ans. (c) 84. Computers are used in Production control in this area: (a) Follow-up activity, (b) To control labour, (c) To disseminate information, (d) Loading, Scheduling and Assignment works. Ans. (d) OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 197 Operations Management – Objective Type Questions and Answers other Types - Question & Answer: 1. Match the product in Column I with the production centre/equipment/plant in Column II. I II A. Furniture i. Assembly line B. Hydro-electricity ii. Reinery C. Television set iii. Carpentry D. Cement iv. Turbo-Alternator E. Aviation Fuel v. Rotary Kiln F. Tools vi. Machine shop Answer: Matching: I 2. II A. Furniture iii. Carpentry B. Hydro-electricity iv. Turbo-Alternator C. Television set i. Assembly line D. Cement v. Rotary Kiln E. Aviation Fuel ii. Reinery F. Tools vi. Machine shop Match the terms shown under ‘X’ with their relevant terms; shown under ‘Y’. X 198 y a. Ranking Method 1. Method Study b. Motion Economy 2. Plant Layout c. Work Sampling 3. Job Evaluation d. Normal Curve 4. Inventory Control e. Use of Templates 5. Statistical Quality Control f. Crashing 6. Network Analysis g. Replacement 7. Value Analysis h. Brainstorming 8. Work Measurement i. Stock Level 9. Maintenance OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Answer: Matching: X 3. y a. Ranking Method 3. Job Evaluation b. Motion Economy 1. Method Study c. Work Sampling 8. Work Measurement d. Normal Curve 5. Statistical Quality Control e. Use of Templates 2. Plant Layout f. Crashing 6. Net work Analysis g. Replacement 9. Maintenance h. Brainstorming 7. Value Analysis i. Stock Level 4. Inventory Control Match the products in Column I with the production centers in Column II. I II (A) Electricity (a) Blast Furnace (B) Petrol (b) Generator (C) Iron (c) Reinery (D) Cloth (d) Assembly Line (E) Car (e) Smithy (F) Cotton Yarn (f) Spinning Mill (G) Forgings (g) Power Loom Answer: Matching: I II (A) Electricity (b) Generator (B) Petrol (c) Reinery (C) Iron (a) Blast Furnace (D) Cloth (g) Power Loom (E) Car (d) Assembly Line (F) Cotton Yarn (f) Spinning Mill (J) Forgings (e) Smithy OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 199 Operations Management – Objective Type Questions and Answers 4. state whether the following statements are TRuE or FAlsE. (i) Method Study should precede Work Measurement. (ii) Merit Rating is used to determine the cost of a product. (iii) Production planning is an essential function in a factory. (iv) Training boosts employee morale. (v) A good Materials Handling system always consists of conveyors. (vi) Increased productivity leads to cost reduction. (vii) Project costs increase as the duration of the project increases. (viii) When demand does not exist in the market, we should start Production Incentives. (ix) A work stoppage generally reduces the cost of production. (x) No handling is the best handling. (xi) It is desirable to conduct work measurement after Method study. (xii) Job Evaluation is used to measure absolute job worth. (xiii) Incentive scheme is introduced by Management with a view to reduce direct labour cost. (xiv) The increase in productivity can be attributed to the application of Industrial Engineering/Techniques, particularly the work study. (xv) Operation process chart incorporates all ive symbols. (xvi) Multiple Activity chart deals with layout problems. (xvii) Standard performance is the natural rate of working of an average operator when he works tinder proper supervision but without any inancial motivation. (xviii) Allowances for non-availability of materials power failure and breakdown of machines are provided for in the standard time for an operation/job. (xix) In carrying-out Job Evaluation studies, point system is the best method. (xx) It is justiied to consider the effect of working condition both in Work Measurement and Job-Evaluation. (xxi) Increase in productivity leads to retrenchment of work force. (xxii) In view of rapid technological advancement we would not concentrate on labour productivity. (xxiii) Piece wage system is a substitute for proper supervision. (xxiv) Personnel Manager has nothing to do with productivity. It is the job of Technical Personnel. (xxv) Ranking is one of the Job Evaluation Techniques. (xxvi) Results available from work sampling study is not 100% accurate. (xxvii) Since breakdown of Plant and machineries is a random phenomenon, it is impossible to do any work measurement in Maintenance Area. (xxviii) Job Evaluation does not help in performance Rating i. There is no difference between Method study and Value Engineering. (xxix) Two-handed process chart is the most suitable Recording Technique in Electronics Assembly Industry. 200 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Answer: (i) True (ii) False (iii) True (iv) True (v) False (vi) True (vii) True (viii) False (ix) False (x) True (xi) True (xii) False (xiii) False (xiv) True (xv) True (xvi) False (xvii) False (xviii) False (xix) True (xx) True (xxi) False (xxii) False (xxiii) False (xxiv) False (xxv) True (xxvi) True (xxvii) False (xxviii) False (xxix) False. 5. Answer the following Queries: (i) Do standard Times allow for relaxation of the Operators? (ii) Is a lift same as an elevator? (iii) Is the use of metric system of weights and measures compulsory in India? (iv) Can the shaping machine be considered a versatile machine tool? (v) Does the Factories Act in India allow the employment of women in all industries? (vi) Is Break-even analysis a management tool? (vii) Is Activity Sampling a technique of Job Evaluation? Answer: 6. (i) Yes (v) No (ii) Yes (vi) Yes (iii) Yes (vii) No (iv) No Given below are two lists—list ‘A’ containing 11 abbreviations and list ‘B’ containing various functional areas associated with production management. Expand the abbreviations and match them with the corresponding functional areas. list ‘A’ list ‘b’ LP Capacity planning PERT Quality control MTM Project funding VA Project viability checking SRAC Inventory management MRP Product design CBA Cost control CAD Product mix determination IFCI Project planning AOQ Work measurement OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 201 Operations Management – Objective Type Questions and Answers Answer: list ‘A’ Expansion Matching with list ‘b’ LP Linear Programming Product mix determination PERT Programme Evaluation and Review Technique Project planning MTM Methods Time measurement Work measurement VA Value Analysis Cost control SRAC Short Run Average Cost Capacity planning MRP Materials Requirement Planning Inventory management CBA Cost Beneit Analysis Project viability checking CAD Computer Aided Design Product design IFCI Industrial Finance Corporation of India Project funding AOQ Average outgoing Quality Quality control 7. Choose the word or phrase which would be appropriate to ill up the blanks in each statement: (i) Statistical analysis is used to determine the optimum policy of ————— maintenance. (ii) Watch and ward personnel are responsible for ————— aspects in a factory. (iii) General purpose machine are less prone to ————— . (iv) The pattern shop in a factory should ideally be near the ————— . (v) Factor Comparison is a method of ————— . (vi) Taylor originated the idea of ————— relationships in an organisation. (vii) ————— cannot be delegated. (viii) Ergonomics is another name for ————— . (x) Gantt chart is used for ————— control. Answer: (i) preventive (ii) security (iii) obsolescence (iv) foundry (v) job evaluation (vi) functional (vii) responsibility (viii) human engineering (ix) product (x) production 202 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 8. Match the terms in Column I with the relevant terms in Column II. column I column II (A) Inventory Control (i) Turbo-Alternator (B) Network Analysis (ii) Crashing (C) Aviation Fuel (iii) Value Analysis (D) Hydro-electricity (iv) Stock Level (E) Improvement in productivity (v) Reinery Answer: (A) – (iv); (B) – (ii); (C) – (v); (D) – (i); (E) – (iii). 9. For each part below, choose the most appropriate answer out of the four options given against each part: (i) The following establishes time sequence of operations: (A) Routing, (ii) (C) Scheduling, (D) Dispatching. Arrangement of machines depending on sequence of operations happens in: (A) Process Layout, (iii) (B) Sequencing, (B) Product Layout, (C) Hybrid Layout, (D) Group Technology Layout. Linear Programming is a technique used for determining: (A) Production Programme, (B) Plant Layout, (C) Product Mix, (D) Manufacturing sequence. Answer: (i) (C) Scheduling, (ii) (B) Product Layout, (iii) (C) Product Mix. 10. For each part below, choose the most appropriate answer out of the four options given against each part. (i) Issuing necessary orders, and taking necessary steps to ensure that the time targets set in the schedules are are effectively achieved is known as: A. Routing, (iii) B. Dispatching, C. Scheduling, D. Inspection. Preventive maintenance is useful in reducing: A. Inspection Cost, B. Shutdown Cost, C. Cost of premature replacement, D. Set-up cost of machine Answer: (i) (B) Dispatching - Dispatching is one of the important production control functions. (i) (B) shutdown cost - Preventive maintenance tries to minimize the problems of breakdown maintenance. It locates weak parts in all equipments, provide them regular inspection and minor repairs thereby reducing the breakdowns. 11. Examine each statement and indicate whether it is ‘True’ or ‘False’ : (i) Project cost increases as the duration of the project increases. (ii) With increase in lot size the setup cost per unit decreases, whereas the inventory carrying cost increases. (iii) If the total loat value is zero, it means the resources are just suficient to complete the activity without delay. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 203 Operations Management – Objective Type Questions and Answers Answer: (i) Project cost increases as the duration of the project increases. –True One of the feature of project is, it has deined start and end dates. If project’s duration time increases, the cost also increases. (ii) With increase in lot size the setup cost per unit decreases, whereas the inventory carrying cost increases. – True. Because, the size and carrying cost are directly related. If size increases the carrying cost also increased. (iii) If the total loat value is zero, it means the resources are just suficient to complete the activity without any delay. – True If the total loat value is negative, it denotes that the resources are not adequate to inish in time. Again, if total loat value is Positive, It denotes that resources are in excess or the resources should be reallocated to avoid the delay, otherwise the activity will be delayed by so much of time. If total loat value is zero, it means the resources are just suficient to complete the activity without any delay. 12. For each part below, choose the most appropriate answer out of the four options given against each part: (i) One of the important charts used in Programme control is: (A) Material chart, (B) Gantt chart, (C) Route chart, (D) Inspection chart. (ii) Generally the size of the order for production in Job production is: (A) Small, (B) Large, (C) Medium, (D) Very large. Answer: (i) (B) Gantt Chart, (ii) (A) Small. 13. Put an appropriate word in blank position : (i) ——— focuses on such areas as inventory goals and wages budgets. (ii) IBFS is optimal and unique when all numbers in the ——— are non-negative. (iii) The investment on machines in a straight line layout is ——— than the investment on machines in a functional layout. Answer: (i) Short-range planning (ii) Net Evaluation Table (iii) Higher 14. 204 Examine each statement and indicate whether it is ‘True’ or ‘False’. (i) A special purpose Machine Tool performs only a limited number of specialised operations with great speed and precision. (ii) Strikes and lock-out are controllable factors affecting Capacity Planning. (iii) Incentives are substitute for lower wages. (iv) Linear Programming does not consider uncertainties (v) Depending on the need, the maintenance activity may be centralized or decentralized. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Answer: (i) TRUE (ii) FALSE (iii) FALSE (iv) TRUE (v) TRUE 15. For each part below, choose the most appropriate answer out of the four options given against each part : (i) One of the product examples for Line Layout is : (A) (ii) (C) Engineering College, (D) Cement. Labour card, (B) Wage card, (C) Credit card, (D) Job card. Cost reduction can be achieved through : (A) (iv) (B) Welding shop, The card which is prepared by the dispatching department to book the labour involved in each operation is : (A) (iii) Repair Workshop, Work sampling, (B) Value analysis, (C) Quality assurance, (D) Supply chain management. Addition of value to raw materials through application of technology is : (A) Product, (B) Production, (C) Advancement, (D) Transformation. Answer: (i) (D) Cement — Line layout is suitable in plants manufacturing standardised products on mass scale like cement, paper, chemical etc. (ii) (D) Job card — A job card gives detail of job to be performed in a production facility. (iv) (B) Value analysis — It is systematic analysis that identiies and selects best alternatives for designs, materials, processes & systems. (v) (B) Production — It is the act of manufacturing goods. 16. Put an appropriate word or two in blank position: (a) To evaluate the work done by preventive maintenance, ———— is derived at from the total time of stoppage of the machine for scheduled and unscheduled maintenance work. (b) In linear programming, the word ‘linear’ establishes certain relationships among different ———— . Answer: (a) Down time (b) Variables 17. Examine each statement and indicate whether it is True or False: (i) In general, long-range forecasting is more useful in production planning. (ii) A work stoppage generally reduces the cost of production. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 205 Operations Management – Objective Type Questions and Answers Answer: (i) In general, long-range forecasting is more useful in production planning — False (ii) A work stoppage generally reduces the cost of production. Reason: Work stoppage does not reduce the cost of production — False 18. Put an appropriate word or two in blank position. (i) ……………..is the interval between placing an order for a particular item and its actual receipt. (ii) Product is a combination of potential utilities for a………………. (iii) A jig contains a device for guiding the………………... Answer: (i) Lead time. (ii) Consumer. (iii) Tools. 19. Examine each statement and indicate whether it is ‘True’ or ‘False’: (i) There is a limit beyond which labour productivity cannot be improved. (ii) When demand does not exist in the market, we should start Production Incentives. (iii) Breakdown maintenance doesn’t require use of standby machines. Answer: (i) TRUE (ii) FALSE (iii) FALSE 20. Put an appropriate word in blank position: (i) Machines are purchased or replaced to ——— the productive capacity. (iii) ——— can be determined using the Northwest Corner Rule. (iv) A ——— is an appliance which holds the work when it is machined. Answer: (i) Increase (ii) IBFS (iii) Fixture 21. Choose the most correct alternative: (i) (Total station time/cycle time × Number of work stations) × 100 is known as (A) Line eficiency (B) Line smoothness (C) Balance delay of line (D) (ii) 206 Station eficiency The most powerful and popular method for solving linear programming problem is (A) Simplex method (B) Graphical method OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (C) Transportation method (D) (iii) Assignment method Most suitable layout for continuous production is (A) Line layout (B) Process layout (C) Group technology (D) Matrix layout Answer: (i) (A) Line eficiency (ii) (A) Simplex method (iii) (A) Line layout 22. Put an appropriate word in blank position: (i) ____________ systems replace human beings to read data from products and documents and interpret the data. (ii) The user’s expectation method of __________ provides a subjective feel of the market. (iii) ____________ control is typically found wherever a particular bottleneck machine exist in the process of manufacturing. (iv) General purpose machines are less prone to ___________. Answer: (i) Barcode (ii) Sales forecasting (iii) Load (iv) Obsolescence 23. (i) Activity Sampling is not a technique of Job Evaluation. (ii) A good plant layout is one of the factors in effective utilization of labour. Answer: (i) True (ii) True OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 207 Operations Management – Objective Type Questions and Answers 208 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT study Note - 8 sTRATEgIc MANAgEMENT INTRoDucTIoN This study Note includes 8.1 Vission, Mission and objective 8.1 VIssIoN, MIssIoN AND obJEcTIVE sTRATEgy: Strategy is all about integrating organizational activities and utilizing and allocating the scarce resources within the organizational environment so as to meet the present objectives. While planning a strategy it is essential to consider that decisions are not taken in a vacuum and that any act taken by a irm is likely to be met by a reaction from those affected, competitors, customers, employees or suppliers. Strategy can also be deined as knowledge of the goals, the uncertainty of events and the need to take into consideration the likely or actual behavior of others. Strategy is the outline of decisions in an organization that shows its objectives and goals, reduces the key policies, and plans for achieving these goals, and deines the business the company is to carry on, the type of economic and human organization it wants to be, and the contribution it plans to make to its shareholders, customers and society at large. Features of strategy: (i) Strategy is important to foresight, the uncertain events of irms/industries . (ii) Strategy deals with long term developments rather than routine operations. For example innovations or new products, new methods of productions, or new markets to be developed in future. (iii) Strategy is created to deal behavior of customers and competitors. (iv) Strategy is a well deined roadmap of an organization. It deines the overall mission, vision and direction of an organization. The objective of a strategy is to maximize an organization’s strengths and to minimize the strengths of the competitors. strategic management: Strategic management is deined by William F. Glueck as “a stream of decisions and actions which leads to the development of an effective strategy or strategies to help achieve objectives.” Strategic management according to Alfred D. Chandler is “determination of the basic long-term goals and objectives of an enterprise and adoption of course of action and allocation of resources necessary to carry out these goals.” Recently Harrison & St. John deine Strategic Management as the process through which organisations analyse and learn from their internal and external environments, establish strategic direction, create strategies that are intended to help achieve established goals, and execute these strategies, all in an effort to satisfy key organisational stakeholders. So Strategic Management is considered as either decision making and planning or a set of activities related to the formulation and implementation of strategies to achieve organisational objectives. The Advantages of strategic Management • Discharges board Responsibility The irst reason that most organizations state for having a strategic management process is that it discharges the responsibility of the Board of Directors. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 209 Strategic Management Introduction • Forces an objective Assessment Strategic management provides a discipline that enables the board and senior management to actually take a step back from the day-to-day business to think about the future of the organization. Without this discipline, the organization can become solely consumed with working through the next issue or problem without consideration of the larger picture. • provides a Framework for Decision-Making Strategy provides a framework within which all staff can make day-to-day operational decisions and understand that those decisions are all moving the organization in a single direction. It is not possible (nor realistic or appropriate) for the board to know all the decisions the executive director will have to make, nor is it possible (nor realistic or practical) for the executive director to know all the decisions the staff will make. Strategy provides a vision of the future, conirms the purpose and values of an organization, sets objectives, clariies threats and opportunities, determines methods to leverage strengths, and mitigate weaknesses (at a minimum). As such, it sets a framework and clear boundaries within which decisions can be made. The cumulative effect of these decisions (which can add up to thousands over the year) can have a signiicant impact on the success of the organization. Providing a framework within which the executive director and staff can make these decisions helps them better focus their efforts on those things that will best support the organization’s success. • supports understanding & buy-In Allowing the board and staff participation in the strategic discussion enables them to better understand the direction, why that direction was chosen, and the associated beneits. For some people simply knowing is enough; for many people, to gain their full support requires them to understand. • Enables Measurement of progress A strategic management process forces an organization to set objectives and measures of success. The setting of measures of success requires that the organization irst determine what is critical to its ongoing success and then forces the establishment of objectives and keeps these critical measures in front of the board and senior management. • provides an organizational perspective Addressing operational issues rarely looks at the whole organization and the interrelatedness of its varying components. Strategic management takes an organizational perspective and looks at all the components and the interrelationship between those components in order to develop a strategy that is optimal for the whole organization and not a single component. The Disadvantages of strategic Management • The Future Doesn’t unfold as Anticipated One of the major criticisms of strategic management is that it requires the organization to anticipate the future environment in order to develop plans, and as we all know, predicting the future is not an easy undertaking. The belief being that if the future does not unfold as anticipated then it may invalidate the strategy taken. Recent research conducted in the private sector has demonstrated that organizations that use planning process achieve better performance than those organizations who don’t plan - regardless of whether they actually achieved their intended objective. In addition, there are a variety of approaches to strategic planning that are not as dependent upon the prediction of the future. • It can be Expensive There is no doubt that in the not-for-proit sector there are many organizations that cannot afford to hire an external consultant to help them develop their strategy. Today there are many volunteers that can help smaller organizations and also funding agencies that will support the cost of hiring external consultants in developing a strategy. Regardless, it is important to ensure that the implementation of a strategic management process is consistent with the needs of the organization, and that appropriate controls are implemented to allow the cost/beneit discussion to be undertaken, prior to the implementation of a strategic management process. 210 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT • Long Term Beneit vs. Immediate Results Strategic management processes are designed to provide an organization with long-term beneits. If you are looking at the strategic management process to address an immediate crisis within your organization, it won’t. It always makes sense to address the immediate crises prior to allocating resources (time, money, people, opportunity, cost) to the strategic management process. • Impedes Flexibility When you undertake a strategic management process, it will result in the organization saying “no” to some of the opportunities that may be available. This inability to choose all of the opportunities presented to an organization is sometimes frustrating. In addition, some organizations develop a strategic management process that become excessively formal. Processes that become this “established” lack innovation and creativity and can stile the ability of the organization to develop creative strategies. In this scenario, the strategic management process has become the very tool that now inhibits the organization’s ability to change and adapt. strategic Management Framework: The basic framework of strategic management involves ive stages: stage 1: In this stage, organisation analyse about their present situation in terms of their Strengths, Weaknesses, Opportunities and Threats. stage 2: In this stage, organisations setup their missions, goals and objectives by analysing where they want to go in future. stage 3: In this stage organisation analyses various strategic alternatives to achieve their goals and objectives. The alternatives are analysed in terms of what business portfolio/product mix to adopt, expansion, merger, acquisition and divestment options etc are analysed to achieve the goals. stage 4: In this organisations select the best suitable alternatives in line with their SWOT analysis stage 5: This is implementation stage in which organisation implement and execute the selected alternatives to achieve their strategic goals and objectives. Stage 1: Where are we now? Analysis of present situation Stage 2: Where we want to go? Setting goals and objectives for future Stage 3: Analyses of various alternatives to achieve the goals and objectives Stage 4: Selecting best alternatives in line with strengths of organisation Stage 5: Implementing and executing the selected alternatives and monitoring of the same overtimes strategic Management Framework Importance of strategic Management: (i) Discover organisation strengths and weaknesses (ii) Identify the available opportunities and possible threats OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 211 Strategic Management Introduction (iii) Discover the objectives and goals in line with organisations strengths and available opportunities (iv) Implement changes to overcome weaknesses and manage the threats. (v) Provide vision/mission or direction to future of organisations (vi) Build a dynamic and strong organisation (v) Help to achieve growing and stable organisation. strategic Management process: 1. Introduction Strategic management is a process or series of steps. The basic steps of the strategic management process are (presented in igure) (a) identifying or deining business mission, purpose and objectives, (b) environmental (including global) analysis to identity present and future opportunities and threats, (c) organisational analysis to assess the strengths and weaknesses of the irm, (d) developing alternative strategies and choosing the best strategy, (e) strategy implementation, and (f) strategic evaluation and control. step 1 step 2 step 3 step 4 step 5 step 6 Identifying/ Deining Business Mission Purpose & Objectives Environmental Analysis Revise Organisational Direction Alternative Strategic Choice Strategy Implementation Strategic Evaluation & Control Major steps in strategic Management process steps of strategic Management process: step 1: Identifying Deining Business Mission, Purpose and Objectives: Identifying or deining an organisation’s existing mission, purpose and objectives is the logical starting point as they lay foundation for strategic management. Every organisation has a mission, purpose and objectives, even if these elements are not consciously designed, written & communicated. These elements relate the organisation with the society and states that it has to achieve for itself and to the society. step 2: Environmental Analysis: Environmental factors — both internal environment and external environment — are analysed to: (i) identify changes in the environment, (ii) identify present and future threats and opportunities, and (iii) assess critically it’s own strengths and weaknesses. Organisational environment encompasses all factors both inside and outside the organisation that can inluence the organisation positively and negatively. Environmental factors may help in building a sustainable competitive advantage. step 3: Revise organisational Direction: A thorough analysis of organisation’s environment pinpoints it’s strengths, weaknesses, opportunities and threats (SWOT). This can often help management to reafirm or revise it’s organisational direction. 212 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT step 4: strategic Alternatives and choice: Many alternative strategies are formulated based on possible options and in the light of organisational analysis and environmental appraisal. Alternative strategies will be ranked based on the SWOT analysis. The best strategy out of the alternatives will be chosen. The steps from identiication of business mission, purpose and objectives of alternative strategies and choice can be grouped into the broad step of strategy formulation. step 5: strategy Implementation: The ifth step of strategic management process is the implementation of strategy. The logically developed strategy is to be put into action. The organisation can not reap the beneits of strategic management, unless the strategy is effectively implemented. The managers should have clear vision and idea about the competitor’s strategy, organisation’s culture, handling change, skills of the managers-in-charge of implementation and the like. The progress from the stage of identiication of business mission, purpose and objectives to the stage of achieving desired performance must overcome many obstacles. step 6: strategic Evaluation and control: The inal step of strategic management process is strategic evaluation and control. It focuses on monitoring and evaluating the strategic management process in order to improve it and ensure that it functions properly. The managers must understand the process of strategic control and the role of strategic audit to perform the task of control successfully. Strategic management process is presented as a series of discrete steps for the purpose of simplicity in the learning process. But, managers ind that an organisation’s strategic management effort requires that they perform several steps simultaneously and/or perform them in different order as presented in Figure below: Feed forward strategy Implementation strategy Formulation • Project • Organisational Appraisal Business Mission, Objectives • Procedural Revised (if necessary) Business Mission, Objectives Strategic Alternatives and Choice • Structural • Behavioural strategy Formulation control • Evaluation • Control of strategy • Functional • Implementation Environmental Appraisal Feedback strategic Management process Model VIsIoN Vision is a statement of the future. It articulates the basic characteristic that shape organisations strategy. It indicates where the organisation is headed and what it intends to be. Vision, Mission and objectives in business: ‘Strategy Formulation’ i.e. developing vision, mission, objectives and goals is the most important step of strategic management model. This step is considered as a path forming step, and provides the direction to organisation for movement in future. Vision: There is a quote that ‘great visionary can foresee the future in advance and take steps accordingly to be at forefront’. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 213 Strategic Management Introduction So, we can conclude that; 1. Vision provide a road map to Company’s future 2. Vision indicates the kind of company management is trying to create for future. 3. Vision speciies about company intention and capabilities to adapt to new technologies 4. Vision also speciies management policies towards customers and societies. Strategic vision speciies primarily three elements: 1. Forming a mission statement that deines what business the company presently is in? And “who we are and where we are now?” 2. Using this mission statement as base to deine long term path by indicating choices about “Where we are going?” 3. Finally, communicating above strategic vision in clear and committed term. Strategic Vision has important purposes, such as: 1. Clearly provide the direction that company wants to follow 2. Identify the need of changing from existing direction or products, if stated in vision statement 3. Create passionate environment in the organisation to steer the company with great excitement in selected direction. 4. Create creativity in every member of company to prepare company for future 5. Promote entrepreneurship Meaning and use of Mission: The term ‘mission’ implies the fundamental and enduring objectives of an organisation that set it apart from other organisations of similar nature. The mission is a general enduring statement of instruction of an organisation. The corporate mission is the purpose or reason for it’s existence. It refers the philosophy of business to the static decision maker to build the image of the company. The corporate mission highlights the organisation self-concept and indicates the nature of product or service to be offered or rendered for fulillment of the requirements of the customers as also for the community and society as a whole. The mission may, as such, be described as the scope of operations in terms of product, market or the service as well as customers and clients. An organisation may deine it’s mission highlighting the philosophy and purpose. The philosophy establishes the values, beliefs and guidelines for the business plan and business operation. The mission of a irm deines it’s reasons for existence. Mission includes: • A deinition of products and services the organisation provides. • Technology used to provide these products and services. • Types of markets. • Customer need or requirement. • Distinctive Competencies. organisational Mission and objectives: In one way, objective setting is the starting point of strategy formulation. Organisations, being deliberate and purposive creations, have some objectives. The ends for which they strive are referred to as ‘mission,’ ‘purpose,’ ‘objective’, ‘goal’, or ‘target’. Though there are differences in these terms, often the differences are not emphasised and these terms are used interchangeably in practice to denote the end results for which organisations strive. However, the end results of organisations, or their parts, can be deined in various ways. For example, these can be deined in quantitative terms to be achieved in speciic time or may be 214 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT deined in some general terms without reference to any time period. In these two cases, the end results have been expressed, however, the emphasis is different. Thus some distinction can be made in these terms. purpose and Mission: An organisation’s purpose and mission consist of a long-term vision of what it seeks to do and the reasons why it exists. Purpose is management’s concept of the organisation and it’s service mission to society. An organisation’s purpose, when expressed in managerially meaningful terms, indicates exactly what activities the organisation intends to engage in now and in future. It suggests something speciic about what kind of organisation it is and is to become. It depicts the organisation’s business character and does so in ways that tend to distinguish the organisation from other organisations. Thus purpose and mission can be deined as follows: The purpose and mission of an organisation is a general enduring statement of the organisation the intent of which embodies the decision maker’s business philosophy; it implies the image which the organisation seeks to project. In this sense, purpose sets forth principles and conceptual foundation upon which the organisation rests and the nature of the business in which it plans to participate. Organisational mission, deined properly, offers guidance to managers in developing sharply focused, result-oriented objectives, strategies, and policies. Therefore, a detailed understanding of organisational mission is the starting point for rational managerial action and for the design of organisation structure, processes, and procedures. Managerial effectiveness tends to begin with clarity of mission with an accurate, carefully delineated concept of just what the organisation is trying to do and why. A key feature of organisation’s purpose is that it’s focus must be external rather than internal. For example, Drucker has the following suggestion: ‘To know what a business we have to start with is it’s purpose. It’s purpose must lie outside the business itself. In fact, it must lie in society since business enterprise is an organ of society. There is only one valid deinition of business purpose to create a customer. DEFININg THE coMpANy MIssIoN What is a company Mission? The mission is a broadly framed but enduring statement of company intent. It embodies the business philosophy of strategic decision makers; implies the image the company seeks to project; relects the irm’s self-concept; indicates the principal product or service areas and primary customer needs the company will attempt to satisfy. In short, the mission describes the product, market, and technological areas of emphasis for the business. And it does so in a way that relects the values and priorities of strategic decision makers. The mission of a business is the fundamental, unique purpose that sets it apart from other irms of it’s type and identiies the scope of it’s operations in product and market terms. The mission is a general, enduring statement of company intent. It embodies the business philosophy of strategic decision makers, implies the image the company seeks to project, relects the irm’s self-concept, and indicates the principal product or service areas and primary customer heeds the company will attempt to satisfy. In short, the mission describes the product, market, and technological areas of emphasis for the business in a way that relects the values and priorities of the strategic decision makers. The Need for an Explicit Mission: Deining the company mission is time consuming, tedious, and not required by any external body. The mission contains few speciic directives, only broadly outlined or implied objectives and strategies. Characteristically, it is a statement of attitude, outlook, and orientation rather than of details and measurable targets. What then is a company mission designed to accomplish? 1. To ensure unanimity of purpose within the organisation. 2. To provide a basis for motivating the use of the organisation’s resources. 3. To develop a basis, or standard, for allocating organisational resources. 4. To establish a general tone or organisational climate, for example, to suggest a businesslike operation. 5. To serve as a focal point for those who can identify with the organisation’s purpose and direction, and to deter those who cannot from participating further in the organisation’s activities. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 215 Strategic Management Introduction 6. To facilitate the translation of objectives and goals into a work structure involving the assignment of tasks to responsible elements within the organisation. 7. To specify organisational purposes and the translation of these purposes into goals in such a way that cost, time, and performance parameters can be assessed and controlled. Formulation of organisational Mission: Organisation can not declare the mission just on some great whim and fancy, it should be based on organisations’ existing capabilities and achievable milestones. Here are some guidelines for formulation of “mission” statement • It should be based on existing business capabilities “Who we are and what we do?” • It should follow the long term strategy principles • Proit making should not be the only mission of organisation • It should be logical extension of business existing capabilities • It should clearly and precisely present the future orientation of business • It should includes achievable missions • It should be stated in a form that it becomes the motivating force to every member of organisation • Mission statement once formed shall be communicated to every member of organisations • It should include interest of customers and society Organisational mission encompasses the broad aims of the organisation; it deines what for the organisation strives. Therefore, the process of deining the mission for any speciic organisation can be best understood by thinking about it at it’s inception. An organisation begins with the beliefs, desires, and assumptions of single entrepreneur. These beliefs, desires and assumptions may be of the following nature: 1. The product and service offered by the organisation can provide beneits at least equal to it’s price. 2. The product or service can satisfy the needs of the customers not adequately served by others presently. 3. Technology used in producing product or service will be cost and quality competitive, 4. The organisation can grow and be proitable than just survive in the long run with the support of various constituents. 5. The organisation will create favourable public image which will result in contributions from the environment. 6. Entrepreneur’s self-concept of the business can be communicated and adopted by employees and stakeholders. 7. The organisation will be able to satisfy the entrepreneur’s needs and aspirations which he seeks to satisfy through the organisation. At the initial stage, the above elements go into mission formulation. As the organisation grows or is forced by competitive forces to alter it’s product, market, and technology, there may be need for redeinition of the mission. However, the revised mission will relect the same set of elements as the original—like type of product to be offered, type of customer to be served, type of technology to be employed, growth of organisation, favourable public image, self-concept of entrepreneur, and needs and aspirations of entrepreneur, though in modiied form. objectives, goals and Targets: We frequently use the term organisation’s “objectives and goals”, the term “objective and goals” set target of any particular aspect like proit and revenue growth, etc. Here are some common deinitions of Objectives; • Objectives are performance targets which organisations wants as result or outcomes in the speciied periods • Objectives achievements are used as benchmark of organisation performance and success • Objectives are formed from visions and mission statement of organisations 216 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT • Objectives are interchangeably used with goals but goals are deined as more precise and speciic with closed ended attribute (in precise quantity form) whereas objectives are open ended for future states or outcome not as precise as goals. Objectives are for long term whereas goals are for short term Characteristics of Objectives: Objectives characterise business long-term prospective, such as: • Facilitate to achieve mission and goals • Set the basis for strategic decision making • Clear the relationship of organisation with environment • Should be understandable by each member of organisation • Should be measurable and controllable • Should be related to time frame • Should be challenging • Should be concrete and speciic • Should be formed within the constraints • Should motivate people. Formal strategies contain three elements: 1. Goals to be achieved. 2. Policies that guide or limit action. 3. Action sequences or programs that accomplish goal. Effective strategic revolve around the key concepts or thrust area such as customer satisfaction or customer focus. concept of strategic Intent: Here intent refers to intension. A company exhibits strategic intent when it relentlessly (aggressively) pursues an ambitious strategic objective and concentrates it’s full resources and competitive actions on achieving that objective. A company’s strategic intent can helps in many ways to the company, like: • in becoming the dominant company in the industry; • unseating the existing industry leader; • delivering the best customer service in the industry (or the world); • turning new technology into products which capable of changing the way people work and live. Innovations that make their production systems unexpectedly obsolete (technological). objectives and goals: The literature of management is illed with references to objectives and goals. These terms are used in a Varity of ways, many of them conlicting. First, these terms are used interchangeably meaning one and the same thing. Therefore, there is no difference between the two. To make distinction between long-term and short-term orientations, these preixes are used either with objectives or goals. Second, some authors use goals as the long-term results which an organisation seeks to achieve and objectives as the short-term results. Third, some writers reverse the usage referring to objectives as the desired long-term results and goals as the desired short-term results. This latter view is, however, more prevalent. From this point of view, Ackoff has deined both the terms as follows: ‘Desired states or outcomes are objectives. Goals are objectives that are scheduled for attainment during planned period’. Thus objectives and goals deined in this way convey two different concepts. The distinction between these two concepts is important because strategic management needs both. The difference between objectives and goals may be drawn in terms of the following four dimensions. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 217 Strategic Management Introduction 1. Time Frame. Objectives are timeless, enduring, and unending; goals are temporal, time-phased, and intended to be superseded by subsequent goals. Because objectives relate to’ the ongoing activities of an organisation, their achievement tends to be open-ended in the sense of not being bounded by time. For example, the survival objective of a business organisation is never completely attained since failure is always a future possibility. 2. Speciicity. Objectives are stated in broad, general terms, dealing with matters of image, style, and selfperception. These are aspirations to be worked in the future. Goals are much more speciic, stated in terms of a particular result that will be accomplished by a speciic date. In the above example, survival as an objective is not very speciic because it leads to different interpretation of the stale of survival. On the other hand, goals can be expressed in terms of say achievement of 10 per cent growth in the net sales in the next year. This is more speciic and time bound. 3. Focus. Objectives are usually stated in terms of some relevant environment which is external to the organisation; goals are more internally focused and carry important implications about how resources of the organisation are utilised or will be utilised in future. Therefore, objectives are more generalised statements like maintaining market leadership, striving continuously for technological superiority, etc. A goal may imply a resource commitment requiring the organisation to use those resources in order to achieve the desired outcomes. 4. Measurement. Both objectives and goals can be stated in terms which are quantitatively measured but the character of measurement is different. Generally, quantitative objectives are set in relative terms. For example, Reliance Textiles has put it’s objectives like this: to acquire top position among the Indian companies. This objective may net be achieved in any one year, but it is timeless and externally focused, providing a continuing challenge for the company. Quantitative goals are expressed in absolute terms. For example, a company has stated it’s goal to achieve 10 per cent growth in it’s sales in the next year. The achievement of this goal can be measured irrespective of environmental conditions and competitors’ actions. Thus objectives are more speciic as compared to the purpose or mission of the organisation. However, these are expressed in such terms which can be followed continuously. For example, a private sector company has declared as follows: The main objective of the company is to manufacture and distribute both consumer and industrial products of high quality to our customers in India and abroad at a minimum price which will return a reasonable proit to the company. This company will expand and diversify it’s activity as necessary to meet the needs of the customers to render better service/to obtain better quality, or to effect economies in operation. Company Goals: Survival, Growth, Proitability Three economic goals guide the strategic direction of almost every viable business organisation. Whether or not they are explicitly stated, a company mission statement relects the irm’s intention to secure it’s survival through sustained growths and proitability. Unless a irm is able to survive, it will be incapable of satisfying any of it’s stakeholders’ aims. Unfortunately, like growth and proitability, survival is such an assumed goal that it is often neglected as a principal criterion in strategic decision making. When this happens, the irm often focuses on short-term aims at the expense of the long run. Proitability is the mainstay goal of a business organisation. No matter how it is measured or denned, proit over the, long term is the clearest indication of a irm’s ability to satisfy the principal claims and desires of employees and stockholders. The key phrase in the sentence is “over the long term”. Obviously, basing decisions on a shortterm concern for proitability would lead to a strategic myopia. A irm might overlook the enduring concerns of customers, suppliers, creditors, ecologists, and regulatory agents. In the short term the results may produce proit, but over time the inancial consequences are likely to be detrimental. The following excerpt from the Hewlett-Packard Company’s statement of corporate objectives (i.e., mission) ably expresses the importance of an orientation toward long-term proit: 218 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT To achieve suficient proit to inance our company growth and to provide the resources we need to achieve our other corporate objectives. In our economic system, the proit we generate from our operations is the ultimate source of the funds we need to prosper and grow. It is the one absolutely essential measure of our corporate performance over the long term. Only if we continue to meet our proit objective can we achieve our other corporate objectives. A irm’s growth is inextricably tied to it’s survival and proitability. In this context, the meaning of growth must be broadly deined. While growth in market share has been shown by the product impact market studies (PIMS) to be correlated with irm proitability, other important forms of growth do exist. For example, growth in the number of markets served, in the variety of products offered, and in the technologies used to provide goods or services frequently leads to improvements in the company’s competitive ability. Growth means change, and proactive change is a necessity in a dynamic business environment. Hewlett-Packard’s mission statement provides an excellent example of corporate regard for growth: To let our growth be limited only by our proits and our ability to develop and produce technical products that satisfy real customer needs. We do not believe that large size is important for it’s own sake; however, for at least two basic reasons continuous growth is essential for us to achieve our other objectives. In the irst place, we serve a rapidly growing and expanding segment of our technological society. To remain static would be to lose ground. We cannot maintain a position of strength and leadership in our ield without growth. In the second place, growth is important in order to attract and hold high-caliber people. These individuals will align their future only with a company that offers them considerable opportunity for personal progress. Opportunities are greater and more challenging in a growing company. The issue of growth raises a concern about the deinition of a company mission. How can a business specify product, market, and technology suficiently to provide direction without delimiting unanticipated strategic options? How can a company deine it’s mission so opportunistic diversiication can be considered while at the same time maintaining parameters that guide growth, decisions? Perhaps such questions are best addressed when irm outlines-Objectives it’s mission conditions under which it might depart from ongoing operations. The growth philosophy of Dayton-Hudson shows this approach: The stability and quality of the corporation’s inancial performance will be developed through the proitable execution of our existing businesses, as well as through the acquisition or development of new businesses. Our growth priorities, in order, are as follows: (i) Development of the proitable market preeminence of existing companies in existing markets through new store development or new strategies within existing stores; (ii) Expansion of our companies to feasible new markets; (iii) Acquisition of other retailing companies that are strategically and inancially compatible with Dayton-Hudson; (iv) Internal development of new retailing strategies. Capital allocations to fund the expansion of existing operating companies will be based on each company’s return on investment, in relationship to it’s return-on-investment (ROD objective and it’s consistency in earnings growth, and on it’s management capability to perform up to forecasts contained in capital requests. Expansion via acquisition or new venture will occur when the opportunity promises an acceptable rate of long-term growth and proitability, acceptable degree of risk, and compatibility with the corporation’s long-term strategy. Mission and strategy: Mission sets the direction for the strategic development of the organisation. As Drucker remarks in his Managing for the Future, the mission “focuses the organisation on action. It deines the speciic strategies needed to attain the OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 219 Strategic Management Introduction crucial goals. It creates a disciplined organisation. It alone can prevent the most common degenerative disease of organisations, especially large ones, splintering their always limited resources on things that are ‘interesting’ or look ‘proitable’ rather than concentrating them on a very small number of productive efforts”. There are several examples of organisations which substantially developed their business or improved their performance by refocusing their business. “Corporate mission statements are the operational, ethical and inancial guiding lights of companies. They are not simply mottoes or slogans; they articulate the goals, dreams, behaviour, culture, and strategies of companies”. One great advantage of formulation of the mission is that it also results in a clear deinition of the business of a company. Mission statement and deinition of the business are indeed two sides of the same coin. Derect Abell has suggested deining business along three dimensions, viz, customer groups (i.e., who is being satisied) customer functions (i.e., what need of the customer is being satisied) and alternative technologies (i.e., how the need is being satisied). Such a three dimensional deinition of the business would clearly delineate the boundaries and nature of the business. However, not many mission statements are so clear and comprehensive. As Drucker suggests three fundamental questions would help to clearly deine / redeine the business and formulate/reformulate the mission. These questions are: • What is our business? • What will our business be? • What should our business be? The question ‘what is our business’? May lead to wonderful revelations and spectacular results. Drucker points out that most managers ask their question when the company is in trouble - then it must of course, be asked; but the most important time to ask this seriously is when a company has been successful and not to have done so is the reason for the crisis of many organisations. It is, thus, evident that as the business environment is very dynamic, sooner or later even the most successful answer to the question what is our business, becomes obsolete. Therefore, it is not suficient that a company determines what it’s business is but at the same time it should also ponder over what will it be? ‘What changes in the environment are already discernible those are likely to have high impact on the characteristics, mission, and purpose of our business? And how do we now build these anticipations into our theory of business, into it’s objectives, strategies and work assignments?” It is not adequate that a company identiies what will it’s business be? Because this aims at adaptation to anticipated changes - modifying, extending, and developing the existing ongoing business. It does not explore the right irm - environment it for the future. The future may have new or better opportunities outside the current business of the company, or it may not be wise to continue in all or some of the current businesses. There is, therefore, a need to ask ‘what should our business be?’ This question is the central point of corporate strategy. As Drucker aptly remarks, the ultimate objective of strategic planning is “to identify the new and different businesses, technologies, and markets which the company should try to create long range. Indeed, it starts with the question which of our present businesses should we abandon? Which should we play down? Which should we push and supply new resources to Mission is meaningless unless it is adequately supported by other essential inputs. It is very apt to record here Amban’s statement about what made the Reliance one of Asia’s most competitive enterprises: “It has been a combination of vision, entrepreneurship and professionalism”. In sum, as Drucker remarks, “without an effective mission statement there will be no performance. The mission statement has to express the contribution the enterprise plans to make to society, to economy, to the customer. It has to express the fact that the business enterprise is an institution of society, and serves to produce social beneits”. 220 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT strategic levels in organisation There are primarily three levels of strategies in the organisation. 1. Corporate Level 2. Business Level 3. Functional Level 1. corporate level: The corporate level of management consists of the chief executive oficer (CEO), other senior executives, the board of directors, and corporate staff. These individuals occupy the top-committee of decision making within the organisation. The CEO is the principal general manager. In consultation with other senior executives, the role of corporate-level managers is to oversee the development of strategies for the whole organisation. This role includes deining the mission and goals of the organisation, determining what businesses it should be in, allocating resources among the different businesses, formulating and implementing strategies that span individual businesses, and providing leadership for the organisation. For example, strategies formed for Unilever Limited would be at corporate level. 2. business level: A business unit is a self-contained division (with it’s own functions-for example, inance, purchasing, production, and marketing departments) that provides a product or service for a particular market. The principal general manager at the business level, or the business-level manager, is the head of the division. The strategic role of these managers is to translate the general statements of direction and intent that come from the corporate level into concrete strategies for individual businesses. Thus, whereas corporate-level general managers are concerned with strategies that span individual businesses, business-level general managers are concerned with strategies that are speciic to a particular business. At GE, a major corporate goal is to be irst or second in every business in which the corporation competes. Then the general managers in each division work out for their business the details of a strategy that is consistent with this objective. For example, strategies formed for Kwality Walls, a subsidiary of Unilever Limited would be at business level. 3. Functional level: Functional-level managers are responsible for the speciic business functions or operations (human resources, purchasing, product development, customer service, and so on) that constitute a company or one of it’s divisions. Thus, a functional manager’s sphere of responsibility is generally conined to one organisational activity, whereas general managers oversee the operation of a whole company or division. Although they are not responsible for the overall performance of the organisation, functional managers nevertheless have a major strategic role: to develop functional strategies in their area that help fulill the strategic objectives set by business & corporate-level general managers. Moreover, functional managers provide most of the information that makes it possible for business & corporate-level general managers to, formulate realistic and attainable strategies. Indeed, because they are closer to the customer than the typical general manager is, functional managers themselves may generate important ideas that subsequently may become major strategies for the company. Thus, it is important for general managers to listen closely to the ideas of their functional managers. An equally great responsibility for managers at the operational level is strategy implementation: the execution of corporate and business-level plans. For example, strategies formed for employee retention by HR manager at Kwality Walls would be at functional level. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 221 Strategic Management Introduction self learning Questions: 1. What do you mean by Strategy? State its features. 2. What do you mean by Strategy Management? Discuss the framework of Strategic Management. 3. State the importance of Strategic management? 4. Discuss in brief the strategic Management process. 5. What is the guideline in formulation of Mission Statement? 6. Discuss the various Strategic Level in an Organisation. 7. What are the difference between vision and mission? 8. Discuss in brief the formulation of Organisational Mission. 9. Distinguish between Objectives and Goals of business. 10. Developing annual objectives & short term objective strategies that are compatible with the selected set of long term objective are one of the major tasks of strategic Management. Critically comment. 222 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT study Note - 9 sTRATEgIc ANAlysIs AND sTRATEgIc plANNINg This study Note includes 9.1 situational Analysis 9.2 sWoT Analysis 9.3 portfolio Analysis 9.4 bcg Matrices 9.5 stages in strategic planning 9.6 Alternative in strategic planning 9.1 sITuATIoNAl ANAlysIs Introduction The strategic management process, after deciding the vision, mission, goals and objectives of the organization, turns its focus to scanning of both external environment and internal environment. situational Analysis: A company’s macro environment consists of all related dimensions and inluences outside the company’s boundaries; by relevant factors like direction, objectives, strategy, and business model. But inluences coming from the outer globe of the macro environment have a small impact on a company’s business situation.They only shape the limits of the company’s direction and strategy. There are suficient amount of strategically relevant trends and developments in the macro environment. As company managers scrutinize the external environment, they must examine for potentially important environmental forces, assess their impact and inluence, and adapt the company’s direction and strategy as needed. Enterprises and businesses worldwide carry out analyses to assess conditions and environment for strategic planning. Every company consists of certain frameworks that permit them to understand the market and analyze their products. Companies carry out market research by conducting surveys to evaluate market requirements and trends. SWOT & PEST analyses are two methods through which companies plan ahead by conducting research. PEST analysis refers to Political, Economical, Social, and Technological factors which manipulate the business environment. SWOT analysis refers to Strengths, Weaknesses, Opportunity and Threats. These factors are prime determinants of strategic planning. Without SWOT and PEST analysis companies might fail to achieve desired goals. PEST Analysis looks at external factors and is primarily used for market research. It is used as an alternative to SWOT analysis: (i) political – These are the external factors that inluence the business environment. Government decisions and policies affect a irm’s position and structure, Tax laws, monetary and iscal policies as well as reforms of labor and workforce, all inluence companies in future. These factors are importantand need to be managed in order to overcome uncertainty. (ii) Economical – Economical factors are the most important since it impacts business in the long run. Inlation, interest rates, economic growth and demand/supply trends are to be considered and analyzed effectively before planning and implementing. Economic factors affect both consumers and enterprises. (iii) social – Social factors involve the trends of population, domestic markets, cultural trends and demographics. These factors help businesses assess the market and improve their products/service accordingly. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 223 Strategic Analysis and Strategic Planning (iv) Technological – This analyses the technology trends and advancements in business environment, innovations and advancements lowers barriers to entry plus decreased production levels as it results in unemployment. This includes research and development activity, automation and incentives. (i) It presents a business’ standing and position, i.e. whether it is weak or strong (ii) It informs about both internal and external factors that affect a irm’s success and/or failure (iii) It helps irms assess the report and take counter measures for improvement and analyzing threats (iv) It forecasts the future and sheds light on the current situation (v) Evaluates business environment and allows irms to make strategic decisions (vi) Prevents future failure and creates a system of continuous success (vii) Provides companies with a reality check on their performance and shortcoming (viii) Enables irms to understand the economy and market and expand (ix) Provides a mechanism to identify threats and opportunities (x) Enables companies to learn about markets and enter new markets nationally or globally. Advantages & Disadvantages of pEsT & sWoT Analysis Both SWOT & PEST analyses are simple and easy to list but hard to implement fully. It takes time and research to completely analyze the situation. SWOT analysis might not be able to provide results for each factor plus for the analysis to be successful, it requires expertise which would analyze all possible threats and weaknesses and turn them into strength and opportunity. It requires resources and capital to perform and a positive outcome cannot be guaranteed. PEST analysis is to be used if the SWOT analysis of a company fails and they need to study markets. It focuses on external factors and not on the irm’s internal factors which can cause conlict. PEST analysis works on a macro scale as it includes economic factors. These factors are uncertain and change constantly depending on the state of the country. SWOT analysis is considered the bestbecause it focuses on internal and external factors both while PEST only focuses on external factors. Some top companies like Ford, Microsoft and Sony prefer monthly SWOT analysis as their markets are expanding and growing every month and they consider internal factors of the company important. Example of situational analysis Increased government allocations to social sector programs in line with its commitment to inclusive growth, a progressive policy environment, and a slew of social protection schemes, decentralized planning and governance have all impacton the improving lives of India’s children and women. But with nearly half a billion children in this country, a lot more remains to be done to make sure the survival, growth and development of India’s greatest asset: its children. persistently high malnutrition rates, poor sanitation and persistent disparities between states, social groups and the rich and the poor are just some of the obstacles that India come across in ensuring that every child is reached. The report provides snapshots of the situation of children and women from 18 states of the country. In addition to demographic information of children and women in 18 states, the report details progress agaist MDGs and child protection indicators. Equity status of key indicators on children and women are also presented for each state. 9.2 sWoT ANAlysIs swot Analysis: Gathering data about the general, operating, and internal environments provides the raw material from which to develop a picture of the organisational environment. sWoT analysis reines this body of information by applying a general framework for understanding and managing the environment in which an organisation operates. (The acronym SWOT stands for Strengths, Weaknesses, 224 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Opportunities, and Threats.) In many respects, the sophisticated analytical techniques discussed throughout the text are further reinements of basic SWOT analysis. In addition, students have repeatedly told us that SWOT is an excellent way to begin a case analysis. SWOT analysis attempts to assess the internal strengths and weaknesses of an organisation and the opportunities and threats that it’s external environment presents. SWOT seeks to isolate the major issues facing an organisation through careful analysis of each of these four elements. Managers can then formulate strategies to address key issues. The appraisal should give particular attention to the following. (a) A study of past accounts and the use of ratios. By looking at trends, or by comparing ratios (if possible) with those of other irms in a similar industry, it might be possible to identify strengths and weaknesses in major areas of the business. The assistance of a management accountant should be of great value in this work. (b) Product position and product-market mix. This very important area is dealt with later. (c) Cash and inancial structure. If a company intends to expand or diversify, it will need cash or suficient inancial standing in order to acquire subsidiaries by issuing shares. (d) Cost structure. If a company operates with high ixed costs and relatively low variable costs, it might be in a relatively weak position with regards to production capacity. High volumes of production and sale might be required to break even. In contrast, a company with low ixed costs might be more lexible and adaptable so that it should be able to operate at a lower breakeven point. (e) Managerial ability. There may be a problem in attempting to assess this and objective measurements should be sought. The danger is that a poor management might overestimate their own ability and incorrectly analyse their weakness as strength. The purpose of the analysis is to express, qualitatively or quantitatively, which areas of the business have strengths to exploit, and which areas have weaknesses which must be improved. Although every area of the business should be investigated, only the areas of signiicant strength or weakness should warrant further attention. While inalising the corporate plan together with corporate objectives, growth strategies, it would be necessary to make a review of the corporate strengths and weaknesses in connection with it’s mission and objectives. This is an important managerial task linked with corporate planning process. Corporate strengths and weaknesses can be broadly enumerated as under: corporate strengths: Highly professionalised managerial group including directors and the chief executive an environment prevailing for commitments to jobs and responsibility with team spirit by the work force (i) Financially very sound (ii) Good products and product-mix with high demand including future prospects (iii) Full capacity utilisation, locational advantages (iv) Good infrastructures (v) Good industrial relations (vi) No political interference (vii) Good performance in production and services with consistent records (viii) Good raw materials base (ix) Incentives from State Government (x) Good relation with Government departments (xi) Technologically rich and with expertise These are the corporate strengths within and outside the organisation. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 225 Strategic Analysis and Strategic Planning corporate Weaknesses: Similar to Corporate strengths, there may be corporate weaknesses too. These may be enumerated as under: (i) Under-utilisation of capacity due to economic slump (ii) High debt burden in the capital structure (iii) Poor product-mix (iv) Lack of managerial strengths (v) Industrial unrest (vi) Technology gap (vii) Demand gap (viii) Poor infrastructures (ix) Raw materials source at a distance (x) Lack of latest information technology (xi) Competition war (xii) Global threats Both corporate strength and corporate weaknesses are examined and reviewed together in connection with corporate mission and objectives. A balanced and appropriate mix from both strengths and weaknesses is made in order to formulate a good corporate plan, which can be achieved and fulilled during it’s entire plan period. During these exercises on the corporate plan, all aspects related to the company including it’s strengths and weaknesses are examined. This exercise includes SWOT analysis. Now we outline the ‘opportunities’ and ‘threats’. opportunities: The following may be termed as ‘Opportunities’ which should be timely utilised and availed of by the organisation gainfully: (i) Seasonal/climatical demand of products (ii) Global markets for the company’s products/services (Export opportunities) (iii) Rural markets to explore and to penetrate (iv) To explore the markets in the undeveloped/under-developed/developing states/places (v) To avail of the incentives/concessions declared by Central and State Governments (vi) Diversiications opportunities (vii) Mergers/acquisition opportunities (viii) Good home market available due to boost in the economy (ix) Liberalised policies of the Government both at Centre as well as State level for the individual production and industrial developments. Similar to opportunities, there may be threats too prevailing from time to time, which must be examined and necessary action taken to be free from these or to solve these prudently so that loss to the organisation may be minimum. The probable threats, which may arise or be faced by the organisation, are listed out as under: Threats: (i) Globalisation (ii) Competition (iii) Price cutting war 226 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (iv) Free imports (v) Industrial unrest (vi) Political instability (vii) Quality thrusts (viii) High and adverse debt equity ratio (ix) Increase in inancing cost (x) Economic slow down due to international recession impact In the above Para, details of: (i) Strengths (ii) Weaknesses (iii) Opportunities (iv) Threats Each and every factor of the SWOT would be analysed critically to ind out a best alternative out of various alternatives available. 9.3 poRTFolIo ANAlysIs Portfolio analysis is a term used in describing methods of analysing a product -market portfolio with the following aims. (i) To identify the current strengths and weaknesses of an organisation’s products in its markets, and the state of growth or decline in each of these markets. (ii) To identify what strategy is needed to maintain a strong position or improve a weak one. Several matrices have been developed over the years to analyse market share, market growth and market position. Factors inluencing Portfolio Strategy: There are number of factors - historical, personal, strategic, environmental etc. which inluence portfolio strategy. Important such factors are given below: 1. Mission/Vision: The mission of the company is one of the most important factors which inluence, the portfolio strategy because the mission deines the scope and purpose of the company. Formulation of clear vision about the future has let to restricting the portfolio companies like Glaxo. 2. Value system: A factor very much complimentary to the mission that inluences the portfolio strategy is the value system of the promoters or major stock holders. After the Murugappa group took over the EID Parry, the liquor business of the EID Parry group was sold off as the Murugappa group management felt that it was unethical to be in the liquor business. 3. Future of current business: The future prospects of the current business are a very important factor inluencing the portfolio strategy. If a current business, particularly the most important one, has a bleak future a company would be tempted to divest or diversify into growing business. Having felt that the future of the tobacco business would be very bleak, the ITC diversiied into speciality paper, packaging and printing, hotels, agribusiness, inancial services and international business etc. and today the non-tobacco businesses contribute a considerable share of the total turnover of ITC. (Some of these diversiications, however, have not been successful, and the company has, therefore, decided to concentrate more on its core businesstobacco). OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 227 Strategic Analysis and Strategic Planning 4. position on the portfolio Matrix/plc: The position of different business on the product portfolio life cycle also may inluence the portfolio strategy of a company. Products in the declining stage may be dropped. Similarly some of the dogs or question marks could also be eligible candidates for divestment. Several Indian companies, like the Ceat, have decided to drop businesses which are peripheral or which are not important in terms of business volume or are not otherwise satisfactory in terms of performance and which do not hold out promises for the future of the company. They have adopted the strategy of focusing on the core business (es). 5. government policy: Government policy sometimes is an important determinant of portfolio strategy. The pre1991 regulatory regime did not permit many companies, particularly large ones and foreign irms, to pursue the type of growth and diversiication strategies they would have followed in an environment of business freedom, resulting in distorted portfolios. The liberalisation has very signiicantly transformed the environment. The grant of more autonomy to the Navarathnas has provided them with considerable leeway for charting out their future growth. 6. competitive Environment: The competitive environment too has its inluence on the portfolio strategy of many companies. When competition is absent or limited, as in a protected market, even irms which are ineficient may be able to thrive. The protection itself may prompt irms to enter such business. However, as the market becomes competitive, as has been happening in India because of the liberalisation, things may undergo drastic changes. Many irms which survived or lourished in the protected regime would not be able to survive the competition. Further, for various reasons mentioned under the Case for Focusing, it would become necessary to focus on the core business. 7. company Resources: The resources and strengths of the company, undoubtedly, are important factors inluencing the ‘portfolio strategy’. 8. supply/Demand conditions: Problems with input supplies may encourage backward integration. Similarly, problems with marketing the output, or advantages of value addition, may encourage forward integration. When products or services can be obtained cheaply/ more eficiently from outside, it may encourage the dropping of such business and dependence on outside sources. 9. competitive Moves: Some irms have a tendency to imitate the growth pattern of the established popular irms. There are irms which follow almost the same portfolio strategies of competitors. Sometimes irm A enters an important business of irm B, the latter may retaliate by entering the business of the former. There are also cases of irms refraining from certain business for fear of such retaliations. 10. portfolio strategy of parent: The portfolio strategy of subsidiaries may be inluenced by the portfolio strategy of the parent as has been the case with companies like Glaxo India, ICI and Hindustan Lever. 11. business Environment: The business environment, in general, is an inluencer of the portfolio strategy and, quite obviously, signiicant changes in business environment have important implications for portfolio strategy. 9.4 bcg MTRIcEs boston Matrix: The Boston Consulting Group (BCG)’s matrix analyses ‘products and businesses by market share and market growth.’ High star Question mark cash cow Dog Market growth low High 228 low Market share OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT This growth/share matrix for the classiication of products into cash cows, dogs, rising stars and question marks is known as the Boston classiication for product-market strategy. (i) Stars are products with a high share of a high growth market. In the short term, these require capital expenditure, in excess of the cash they generate, in order to maintain their market position, but promise high returns in the future. (ii) In due course, however, stars will become cash cows, with a high share of a low-growth market. Cash cows need very little capital expenditure and generate high levels of cash income. The important strategic feature of cash cows is that they are already generating high cash returns, which can be used to inance the stars. (iii) Question marks are products in a high-growth market, but where they have a low market share. A decision needs to be taken about whether the products justify considerable capital expenditure in the hope of increasing their market share, or whether they should be allowed to ‘die’ quietly as they are squeezed out of the expanding market by rival products. Because considerable expenditure would be needed to turn a question mark into a star by building up market share, question marks will usually be poor cash generators and show a negative cash low. (iv) Dogs are products with a low share of a low growth market. They may be ex-cash cows that have now fallen on hard times. Dogs should be allowed to die, or should be killed off. Although they will show only a modest net cash outlow, or even a modest net cash inlow, they are ‘cash traps’ which tie up funds and provide a poor return, on investment, and not enough to achieve the organisation’s target rate of return. There are also infants (i.e. products in an early stage of development) and warhorses (i.e. products that have been cash cows in the past, and are still making good sales and earning good proits even now). The car industry provides interesting examples to it the BCG matrix. Ford, with the Fiesta, Escort and to a lesser extent, the Sierra has had a range of stars, which cost a substantial amount to develop and launch, but which soon became cash cows. Vauxhall invested heavily in the Cavalier, with great success, and here we see an example of a question mark turning into a star and then a cash cow, and the Cavalier has been at the forefront of Vauxhall’s return to marketing success. limitations of the bcg Model: The BCG model analyses products in the light of two variables: the growth in the market as a whole, and the growth of the product’s share of the market in relation to other products. It suggests that there is a relationship between these variables and the product’s propensity to generate cash or consume it. It rests on the assumption that the irm with the highest market share can be the lowest cost producer. The model suggests that cash cows should be used to fund stars. There are a number of limitations to the model (and remember that it is only a model, and any model necessarily simpliies the real world which it tries to depict). (i) How do you deine your market? Segmentation strategies can provide a niche. A niche is inevitably a low or restricted share of the market, yet it is the heart of a focus strategy. Firms can proit servicing small low-growth niches. (ii) Market growth and market share are assumed to be reliable pointers for cash low. This is often not true. High market share does not necessarily mean high proits, especially if a irm has high costs, or has bought market share by low pricing. (iii) Relative market share amongst competitors is not necessarily an indication of their competitive strengths at any particular time. After all, market leaders are vulnerable. (iv) The BCG model might become a self-fulilling prophecy: Dogs which could be made proitable might simply be left to the rather than be resuscitated. (v) It does not suggest any response to declining markets other than withdrawal: many irms can make money in ‘sunset industries’. (vi) It ignores the extent to which a irm which serves a number of markets can exploit production synergies. (vii) It ignores the threat of substitute products. The product life cycle concept can be added to a market share/market growth classiication of products, as in Fig. below: OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 229 Strategic Analysis and Strategic Planning Introduction Growth Maturity stars High share, High growth Still needing Cash for Further investment Warhorses High share, negative growth, positive cash low cash cows High share, low growth, large positive cash low sales Infants Negative cash low Decline Dogs Low share, low growth, modest positive or negative cash low Question Marks Low share, High growth, large negative cash low Dodos Low share, Negative growth, negative cash low Time Product Life Cycle with market share/market growth classiication These matrices straightaway focus attention on the strategies most logical for investments in the four quadrants. Thus for stars, the logical strategy both from a long-term perspective as also for immediate business reasons, should be preferably to increase market share or at least to hold on to existing market share. For cash cows, in view of market growth, any attempt to increase market share, particularly, if it requires very substantial investment and cash outgo, is hardly a logical strategy. Over the years, these investments do not have very substantial growth prospects. The logical strategy, is therefore, to hold on to the market share and harvest as much cash as possible in the form of retained proit. For dogs, four strategies are feasible: invest to increase the market share and get into the question mark category; harvest; divest; invest to get into the cash cow category. For a question mark, two possible strategies exist: elevate itself into the star category; disinvest. It will thus be seen that the logical progression of an investment should be anticlockwise, as shown in next Fig. Any progression in the opposite direction would be indicative of bad strategic management. Question Marks stars cash cow Dog Fig.: logical progression of Investment 230 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT In order to dominate a market, a company must normally gain that dominance when the market is in the growth stage of the product life cycle. In a state of maturity, a market is likely to be stable with customer loyalties fairly ixed. It is therefore, more dificult to gain share. But if all companies in the growth stage attempt to gain market share, competition will be very ierce, therefore only those companies prepared to invest in order to gain share will achieve dominance. This may well suggest that a company following the principles suggested by the BCG will need to price low and spend high amounts on advertising and selling in order to dominate such a strategy is one of high risk unless such low margin activity is inanced by higher proit earning products. This leads to the idea of a product wise balanced BCG model for the growth share matrix as a tool for product portfolio analysis. The matrix combines market growth rate and market share and thus directly related to the experience curve. Thus for a star, the high volume is likely to yield the beneits of the experience curve and a reduction in cost. This beneit would not be available in case of question mark. In the case of cash cow again, the high volume would lead to the beneits of the experience curve yielding higher potential proit. Dogs are the worst of all combinations. They are often a cash drain and use up a disproportionate share of management time and resources. The implications for the analysis and evaluation of strategy are thus easy to see. ANsoFF’s MoDEl The Ansoff Matrix: Ansoff (1965) demonstrates the choices of strategic direction open to a irm in the form of a matrix (Figure). Figure: The Ansoff product-market scope matrix (adapted from Ansoff, 1965) Market penetration strategy: New Market penetration product development New Markets Existing products Existing Market development Diversiication � Related � unrelated Firm increases its sales in its present line of business. This can be accomplished by: (i) price reductions; (ii) increases in promotional and distribution support; (iii) acquisition of a rival in the same market; (iv) modest product reinements. These strategies involve increasing the irm’s investment in a product/market and so are generally only used in markets which are growing, and hence the investment may be recouped. In this respect the strategy is similar to invest to build and holding strategy as described by the Boston Consulting Group. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 231 Strategic Analysis and Strategic Planning product Development strategy: This involves extending the product range available to the irm’s existing markets. These products may be obtained by: (i) investment in the research and development of additional products; (ii) acquisition of rights to produce someone else’s product; (iii) buying-in the product and ‘badging’ it; (iv) joint development with owners of another product who need access to the irm’s distribution channels or brands. The critical factor to the success of this strategy is the proitability of the customer group for which the products are being developed. Also the irm’s present competitive advantages in serving the market must confer on to the new good. These can include: (i) customer information that allows accurate targeting; (ii) established distribution channels; (iii) a brand which can be credibly applied to the new product. Market Development strategies: Here the irm develops through inding another group of buyers for its products. Examples include: (i) different customer segments - for example, introducing younger people to goods previously purchased mainly by adults; (ii) industrial buyers for a good that was previously sold only to households; (iii) new areas or regions of the country; (iv) foreign markets. This strategy is more likely to be successful where: (i) the irm has a unique product technology it can leverage in the new market; (ii) it beneits from economies of scale if it increases output; (iii) the new market is not too different from the one it has experience of; (iv) the buyers in the market are intrinsically proitable. Diversiication Strategies: Here the irm is becoming involved in an entirely new industry, or a different stage in the value chain of its present industry. Ansoff distinguishes several forms of diversiication: 1. Related Diversiication: Here there is some relationship, and therefore potential synergy, between the irms exists business and the new product/market space: (a) Concentric diversiication means that there is a technological similarity between the industries which means that the irm is able to leverage its technical know-how to gain some advantage. (b) Vertical integration means that the irm is moving along the value system of its existing industry towards its customers (forward vertical integration) or towards its suppliers (backward vertical integration). The beneits of this are assumed to be: 232 • taking over the proit margin presently enjoyed by suppliers or distributors; • securing a demand for the product or a supply of key inputs; OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT • better synchronisation of the value system; • reduction in buyer or supplier power. However, it also means increasing the irm’s investment in the industry and hence it’s ixed cost base. 2. Unrelated Diversiication: This is otherwise termed conglomerate growth because the resulting corporation is a conglomerate, i.e. a collection of businesses without any relationship to one another. The strategic justiications advanced for this strategy are to: • take advantage of poorly managed companies which can then be turned around and either run at a gain to the shareholders or sold-on at a proit; • spread the risks of the irm across a wide range of industries; • escape a mature or declining industry by using the positive cash lows from it to develop into new and more proitable areas of business. ARTHuR D. lITTlE poRTFolIo MATRIX The ADL portfolio matrix suggested by Arthur D. Little (ADL) consists of 20 cells, identiied by competitive position and its stage of industry maturity. In this matrix, the stage of industry maturity is identiied in four stages viz., embryonic, growth, maturity and ageing. The competitive position is categorized into ive classes viz., dominant, strong, favourable, tenable and weak. The purpose of the matrix is to establish the appropriateness of a particular strategy in relation to these two dimensions. The position within the life cycle and of the company is determined in relation to eight external factors (or disciplines) of the evolutionary stage of the industry. These are: (a) market growth rate (b) growth potential (c) breadth of product line (d) number of competitors (e) spread of market share among the competitors (f) customer loyalty (g) entry barriers (h) technology It is the balance of these factors which determines the life cycle. The competitiveness of the organization can be established by looking at the characteristics of each category. The weights must be deined to calculate the matrix position of a particular business. The matrix location of each unit can be used to formulate a natural strategy to accomplish the business goals of the irm. competitive position stage of Industry Maturity Embryonic Dominant Growth Mature Ageing - Startup - Fast growth - Defend position - Defend position - Fast growth - Attain cost leadership - Attain cost leadership - Cost focus - Build barriers - Renew - Renew - Renew - Defend position - Fast growth - Harvest or divest - Act offensive - Act offensive OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 233 Strategic Analysis and Strategic Planning Strong - Start up - Fast growth - Attain cost leadership - Find niche - Differentiate - Renew - Renew - Hold niche - Fast growth - Differentiate - Differentiate - Hang on - Cost focus - Grow with industry - Grow with industry - Act offensive Favourable - Harvest - Start up - Differentiate - Harvest - Harvest - Differentiate - Cost focus - Find niche - Divest - Fast growth - Catch up - Hold niche - Grow with industry - Hang on - Renew - Turnaround - Cost focus - Differentiation focus - Grow with industry Tenable - Start up - Hold niche - Harvest - Divest - Grow with industry - Find niche - Turnaround - Retrench - Hang on - Find niche - Harvest - Retrench - Catch up - Hold niche - Cost focus - Differentiation focus - Turnaround - Cost focus - Differentiation focus - Grow with industry Weak - Find niche - Turnaround - Withdraw - Catch up - Retrench - Divest - Grow with industry - Withdraw - Withdraw The competitive position of a company’s SBU or product line can be classiied as: Dominant - It is comparatively a rare situation where the SBU enjoys monopoly position or very strong market ability of its products. This may be due to high level of entry barriers or protected technology leadership. strong - When an SBU enjoys strong competitive position, it can afford to chalk out its own strategies without too much concern for the competitors. Favourable - In this competitive position, no irm will enjoy dominant market share and the competition will be intense. The strategy formulation much depends on the competitors moves. The market leader will have a reasonable degree of freedom. Analysis of their product portfolio and learning from them would help others while framing their own strategies. Tenable - The tenable competitive position implies that a irm can survive through specialization and focus. These irms are vulnerable to stiff competition in the market. They can withstand with cost focus and differentiation focus strategies. Weak - The weak irms will generally show poor performance. They can withstand with niche strategy and can become strong players in their area. The consistent weak performance may need to divest or withdraw from the product line. 234 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 9.5 sTAgEs IN sTRATEgIc plANNINg The stages in strategic planning are given below: stage I: strategic option generations At this stage, a variety of alternatives are considered, relating to the irm’s product and markets, its competitors and so forth. Examples of strategies might be: (a) increase market share (b) penetration into international market (c) concentration on core competencies (d) acquisition or expansion etc. stage II - strategic options Evaluation Each option is then examined on its merits. (a) does it increase existing strengths ? (b) does it alleviate existing weaknesses ? (c) is it suitable for the irm’s existing position ? (d) is it acceptable to stakeholders ? stage III - strategic selection It involves choosing between the alternative strategies. This process is strongly inluenced by the values of the managers in selecting the strategies. steps in strategic planning A systematic approach to formalizing strategic plans consists of the following steps: (i) An internal analysis that encompasses assessing company strengths and weaknesses, inancial performance, people, operational limitations, corporate culture, current positioning in the market(s), the overall characterization of the condition of the company and critical issues facing by the organization. (ii) An external analysis that focuses on analyzing competitors, assessing market opportunities and threats, evaluating changing technology that could impact the organization, analyzing regulatory or legislative concerns, changes and trends in the market(s) the company operates in and other potential outside inluences on the organization. (iii) Summarizing the current situation based on the information gathered and evaluated in steps one and two. This step is important to the process because it brings together relevant and critical data and information and allows members of the planning team to more easily get a feel for what opportunities and obstacles lie ahead. (iv) Development of a mission, vision or purpose statement. It really does not matter what it is called, but this step is important perhaps more because of the process that the team will go through to develop it than the words that eventually end up on paper. In this step, the team is starting the process of focusing the organization and its people on what the organization is all about and what is important to the organization. (v) Goal setting. Every organization needs goals. Again, focus is a critical element in the success of any business. This step may be the most important of all of the strategic planning steps because it establishes the framework and basis for the development of the other key elements of the plan. (vi) Deining objectives that support the goals. Objectives are more speciic in nature and are supportive of the goal. They bring into even greater focus to the goals of the organization. (vii) Development of strategies. Strategies begin deining how the goals and objectives are going to be achieved. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 235 Strategic Analysis and Strategic Planning (viii) While not all strategic plans include tactics, a good strategic plan will include at least the key tactics thought to be important to supporting the strategies developed in step 7. Generally tactics are more fully developed and added to the plan as time goes on. Tactics are the speciic tasks associated with carrying out strategies. Approaches in strategic planning It is important to operate a planning process which will not only produce realistic and potentially rewarding plans but will also secure the support of all those involved in implementing them. There are three approaches that can be adopted to strategic planning: (i) A top-down process, in which managers are given targets to achieve which they pass on down the line. (ii) A bottom-up process, in which functional and line managers in conjunction with their staff submit plans, targets and budgets for approval by higher authority. (iii) An iterative process, which involves both the top-down and bottom-up setting of targets. There is a toand-from movement between different levels until agreement is reached. However, this agreement will have to be consistent with the overall mission, objectives and priorities and will have to be made within the context of the inancial resources available to the organization. The iterative approach, which involves the maximum number of people, is the one most likely to deliver worthwhile and acceptable strategic plans. strategic Management and strategic planning : Distinction The basic difference between Strategic management and Strategic planning are as follows: strategic Management strategic planning 1. It is focused on producing strategic results; new 1. markets; new products; new technologies etc. It is focused on making optimal strategic decisions. 2. It is management by results. 2. It is management by plans. 3. It is an organizational action process. 3. It is an analytical process. 4. It broadens focus to include psychological, sociological 4. and political variables. It is focused on business, economic and technological variables. 5. It is about choosing things to do and also about the 5. people who will do them. It is about choosing things to do. corporate planning and long-range planning corporate planning - It is concerned with determination of objectives treating the company as a whole. It develops means to achieve the company’s overall objectives. The corporate plans may relate to achieve corporate objectives for short-run and/or long-run. It is an integrated systems approach considering different functions, divisions and units of the organization. Such corporate plans are framed at the corporate level by the top management. long-range planning - It is a systematic and formalized process concerned with directing and controlling future operations of an enterprise towards desired objectives for periods spreading generally over 5 or more years. It provides an opportunity to management to anticipate future problems and have got more lexibility in framing the long-range plans. Corporate planning is not synonymous with long range planning. Corporate planning is concerned with both short periods as well as long periods. The time span depends on how far ahead a company wants to forecast, depends on nature of business and depends on commitment of resources required for it. Corporate planning in an engineering irm will involve long-term considerations but it will have short-term consideration in case of textile irm. Long range planning necessarily connotes planning with a long time horizon, generally ive years or more. Corporate planning is associated with long range planning in labour intensive industries. Corporate planning is concerned with the existing products in existing markets as well as new products and new markets. Long-range planning takes care of only the existing products in existing markets. 236 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT strategic planning and long-range planning The basic divergence between strategic planning and long-range planning lies in the difference in the assumption regarding the future environment of an organisation. In case of long-range planning current knowledge about future conditions is known with certainty that can be relied upon by executives. Accordingly, the course of action for achievement of organisational goals is drawn on the basis of this knowledge. In long range planning the future is forecasted through extrapolation of the historical growth. On the contrary, strategic planning assumes that an organisation must be ready to respond to a dynamic environment and future environmental conditions are not known with perfect certainty. Thus, there is a need to emphasise and understand how the environment assumed is charging. Accordingly, the issue of developing courses of action in response to these changes will have to be taken up. Here, a number of alternatives are generated for several situations for the future. In case of strategic planning, the irm tries to identify opportunities, threats and trends based on which the future prospects are analysed. This difference between long-range planning and strategic planning has been shown in the igure below : long range planning Forecast based on extrapolation Budgets Proits Plan Programmes Implementation Operation control strategic planning Prospects Objectives strategy Operating Performance Strategic goals Operating programmes /budgets Strategic programmes/ budgets Implement by units Implement by projects Operating control Strategic control As shown in the igure above, in case of long-range planning, objectives forecasted through extrapolation are translated into budgets, programmes and proit plans. These are inally implemented. An operating control system is established and the feedback is provided which suggests a change in objectives, if required. The strategic planning leads to the setting-up of two sets of goals – operating performance goals and strategic goals. The operating performance goals are translated into operating budgets and strategic goals are translated into strategic budgets. Accordingly two types of control namely, operating control and strategic control are established. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 237 Strategic Analysis and Strategic Planning 9.6 AlTERNATIVEs IN sTRATEgIc plANNINg A basic premise of good strategic management is that irms plan ways to deal with unfavorable and favorable events before they occur. Too many organizations prepare contingency plans just for unfavorable events; this is a mistake, because both minimizing threats and capitalizing on opportunities can improve a irm’s competitive position. Regardless of how carefully strategies are formulated, implemented, and evaluated, unforeseen events, such as strikes, boycotts, natural disasters, arrival of foreign competitors, and government actions, can make a strategy obsolete. To minimize the impact of potential threats, organizations should develop contingency plans as part of their strategy-evaluation process. Contingency plans can be deined as alternative plans that can be put into effect if certain key events do not occur as expected. Only high-priority areas require the insurance of contingency plans. Strategists cannot and should not try to cover all bases by planning for all possible contingencies. But in any case, contingency plans should be as simple as possible. Some contingency plans commonly established by irms include the following: 1. If a major competitor withdraws from particular markets as intelligence reports indicate, what actions should our irm take? 2. If our sales objectives are not reached, what actions should our irm take to avoid proit losses? 3. If demand for our new product exceeds plans, what actions should our irm take to meet the higher demand? 4. If certain disasters occur—such as loss of computer capabilities; a hostile takeover attempt; loss of patent protection; or destruction of manufacturing facilities because of earthquakes, tornadoes, or hurricanes — what actions should our irm take? 5. If a new technological advancement makes our new product obsolete sooner than expected, what actions should our irm take? Too many organizations discard alternative strategies not selected for implementation although the work devoted to analyzing these options would render valuable information. Alternative strategies not selected for implementation can serve as contingency plans in case the strategy or strategies selected do not work. U.S. companies and governments are increasingly considering nuclear-generated electricity as the most eficient means of power generation. Many contingency plans certainly call for nuclear power rather than for coal- and gas-derived electricity. When strategy-evaluation activities reveal the need for a major change quickly, an appropriate contingency plan can be executed in a timely way. Contingency plans can promote a strategist’s ability to respond quickly to key changes in the internal and external bases of an organization’s current strategy. For example, if underlying assumptions about the economy turn out to be wrong and contingency plans are ready, then managers can make appropriate changes promptly. In some cases, external or internal conditions present unexpected opportunities. When such opportunities occur, contingency plans could allow an organization to quickly capitalize on them. Linneman and Chandran reported that contingency planning gave users, such as DuPont, Dow Chemical, Consolidated Foods, and Emerson Electric, three major beneits: (i) It permitted quick response to change, (ii) It prevented panic in crisis situations, and (iii) it made managers more adaptable by encouraging them to appreciate just how variable the future can be. 238 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT steps in contingency planning Robert Linnemam and Rajan Chandran have suggested that a seven step process as follows: step 1 - Identify the beneicial and unfavourable events that could possibly derail the strategy or strategies. step 2 - Specify trigger points. Calculate about when contingent events are likely to occur. step 3 - Assess the impact of each contingent event. Estimate the potential beneit or harm of each contingent event. step 4 - Develop contingency plans. Be sure that contingency plans are compatible with current strategy and are economically feasible. step 5 - Assess the counter impact of each contingency plan. That is, estimate how much each contingency plan will capitalize on or cancel out its associated contingent event. Doing this will quantify the potential value of each contingency plan. step 6 - Determine early warning signals for key contingency event. Monitor the early warning signals. step 7 - For contingent event with reliable early warning signals, develop advance action plans to take advantage of the available lead time. Beneits of Contingency Planning (i) It will make the future through their proactive planning and advanced preparation. (ii) It will introduce original action by removing present dificulties. (iii) It enables to anticipate future problems. (iv) It will change the goals to suit internal and external changes. (v) It experiments with creative ideas and take initiative. (vi) It will attempt to shape the future and create a more desirable environment. (vii) It permits quick response to change, (viii) It prevents panic in crisis situations. (ix) It makes managers more adaptable to unforeseen changes. self learning Questions: 1. What is the purpose of SWOT analysis? Why it s necessary to do SWOT analysis before selecting a particular strategy for a business organisation. 2. Explain the objective of SWOT analysis and its advantages and criticism. 3. SWOT analysis merely examines the internal environment of an organisation. Comment. 4. What do you mean by Portfolio Analysis and do list down its objective. 5. What are the important concepts in the context of Portfolio Analysis? 6. Explain about the BCG Matrix. 7. Hassan is one of the Indian’s leading detergent manufacturing companies. The irm has more than twenty ive products type. These have been developed over a period of its ten year existence. Some products are very successful while others have not performed well. The challenges for the board have been the formulation of strategy policy in the way the company manages the portfolio of products. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 239 Strategic Analysis and Strategic Planning As a newly recruited qualiied Cost Accountant, your advice is being sought to address the following questions the Products managers has prepared as input into his paper to the Board. (a) Describe the BCG growth sector matrix. (b) Explain what strategic options are available to Hassan in accordance to the BCG Matrix. (c) Outline what limitations the model poses to the Product Managers as he prepares his paper to the Board. 8. Explain the growth strategies under Ansoff Product Market Growth Matrix. 9. Explain the ADL Matrix. 10. Discuss the various stages in Strategic Planning. 11. Discuss Contingency Planning and its seven steps process. 240 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT study Note - 10 FoRMulATIoN AND IMplEMENTATIoN oF sTRATEgy This study Note includes 10.1 stragegy Formulation Function-wise (production strategy, Marketing strategy, Manpower strategy) 10.2 structuring of organisation for Implementation of strategy 10.3 strategic business unit 10.4 business process Re-engineering 10.1 sTRATEgy FoRMulATIoN FuNcTIoN-WIsE Formulation of strategy (i) Develop and evaluate strategic alternatives (ii) Select appropriate strategies for all levels in the organisation that provide relative advantage over competitors (iii) Match organizational strengths to environmental opportunities (iv) Correct weaknesses and guard against threats Implimentation of strategy (i) effectively itting organizational structure and activities to the environment (ii) The environment dictates the chosen strategy; effective strategy implementation requires an organisational structure matched to its requirements. Evaluating results (iii) How effective have strategies been? (iv) What adjustments, if any, are necessary strategy formulation function wise Strategy often require changes in the way an organization is structured for two major reasons: 1. Structure largely dictates how objectives and policies will be established; 2. Structures dictates how resources will be allocated. The choice of structure appears contingent on the strategy of the irm in terms of size, diversity of the products / services offered, and marked served. Whether this is due to inertia, organizational politics, or a realistic assessment of the relative costs of immediate structural change, historical evidence suggests that the existing structure will be maintained and not radically redesigned until a strategy’s proitability is increasingly disproportionate with increasing sales. pRoDucTIoN sTRATEgy Need for a production strategy: The key to successful survival of an enterprise as an independent unit is how eficiently production activity is managed. The two major factors that contribute to business failures are obsolescence of the product line and excessive production costs. These factors themselves have been the outcome of ineffective production planning. Production strategy plays crucial role in shaping the ultimate success of a irm. Being based on objective analysis of external environmental forces and corporate strengths and weaknesses, it enables an organisation to make optimal decisions regarding product, production capacity, and plant location, choice of machine and equipment OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 241 Formulation and Implementation of Strategy and maintenance of existing facilities. Constant review of manufacturing plan aids in maintaining proper balance of capital investment in plant, equipment and inventory, personnel commitment, eficient operation of the production system by bringing in lexibility and versatility in response to schedule luctuations, product mix and variations in raw material and quality control, and ensures effective material handling and planning of facilities. Within the corporate structure, production strategy helps in maintaining full co-ordination with marketing and engineering functions to formulate plans to improve products and services. It calls upon management to keep in constant touch with inance and personnel to achieve the optimal use of assets, cost control, recruitment of suitable production personnel and management of labour disputes and negotiations. Formulating production strategy: The following steps are involved in the formulation of production strategy (i) Study the overall corporate plan and deine the objectives. (ii) Analyse the present production operations and the present and future environment. (iii) Review sales- forecast and marketing. (iv) Make strategic decisions for production. 1. study of corporate plan and statement of objectives: As in other operating areas, production planning begins with corporate objectives and planning premises. Examination of overall corporate planning not only provides overall directions for manufacturing but also answers questions about overall economic, industrial, market and company factors which will limit and otherwise affect the production planning. Within the framework of these overall planning factors, the planner establishes production objectives and deinitions of the general product and process areas in which production operations should concentrate. 2. Analysis of the present production operations and the Environmental Forces: The production manager should analyse the current manufacturing operations arid the present and future environmental trends to determine the company’s manufacturing strengths and weaknesses and to isolate environmental factors such as the manpower supply and new process and equipment developments, which signiicantly affect manufacturing operations. During this phase of manufacturing planning, the planner examines the premises or factors that affect the manufacturing operations speciically. A study of plant location should be made to assess the effectiveness of present location with respect to key supplies and channels of distribution, and analyse the economies of plant location in terms of labour costs and reservoir of labour skills, both short-term and long-term. Percentage of plant capacity being currently used effectively should also be studied. The existing condition of the machinery should be studied and its quality and eficiency should be compared with others in the same ield including overseas competitors. It must also be ascertained as to how many new equipment developments within the industry have been used by the company such as vise of computers for scheduling, automated warehouses, miniaturisation, programmed equipment, etc. Current schedule for replacement of machinery and cost of such replacement also need examination. Regarding maintenance, production manager should check availability of replacement parts. He should also see if the company has work standards to measure productivity. In production scheduling, information regarding down time on machinery, accuracy of scheduling, history of production delays and reasons for the delays, method changes over the past few years and future trends, etc. should be gathered and analysed. Regarding materials aspect of production it is very necessary to analyse the purchasing requirements, rate of inventory turnover, production delays due to out of stock materials, condition of the material handling equipment, adequacy of existing facilities of the material handling equipment, adequacy of existing facilities for storing and warehousing materials and other similar matters. 3. 242 Review of sales Forecast and Marketing Mix: Since planning in other areas affects manufacturing plans, the planner should examine the plans in these areas. Sales goals are the basis upon which speciic operating OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT plans for manufacturing are built. Hopefully, the manufacturing manager will have participated in the development of these goals so that the sales goals can be reconciled with operations limitations. Once settled manufacturing plans can be developed to meet sales goals. The impact of marketing mix, research and development and new product administration on manufacturing are also examined. 4. Making strategic Decisions: Keeping in mind the overall corporate business mix, present production operations, environmental forces, sales forecast and marketing mix, the production manager has to decide about the extent of manufacturing activity, choice of manufacturing process, capacity machines and equipment to be used, and physical facilities. (a) Extent of production Activity: The irst vital decision which a production manager has to make, particularly in consultation with marketing and inance managers, is regarding the extent of manufacturing activity the irm will carry out. There is usually a great deal of choice in the extent of commitment to production, i.e., of vertical integration. At one end of the spectrum are all the items used in production including standard parts, small special components and major components that can be manufactured and completely assembled. At the other end are the inished products that can be bought and the company’s name attached. Nature of the manufacturing operation dictates, to a certain extent, the area where the optimum is likely to be. Even then, there is often a considerable range of variation. A number of factors inluence managerial decision regarding extent of manufacturing activity. A irm will be tempted to manufacture raw materials and components for the products to be sold along with assembling parts, if it inds that this will ensure supplies in accordance with their required quality, quantity and timely availability. This temptation will be further strengthened when costs of producing raw materials and components are found to be less than the price at which suppliers will supply these materials. Uncertainty regarding ready availability of supplies further suggests that the irm should have a captive source of supply of vital raw materials and ingredients. Size of investment involved in developing production facilities also inluences the extent of the irm’s production activity. Where the investment involved is large, introducing new products or changing the product design with consequential charges in the plant facilities are likely to be too costly to bear. In such situations it will be desirable for the irm to procure its materials from outside sources because that provides greater lexibility and adjustment to changes in needs. Financial strength of the irm plays a signiicant role in deciding the extent of the production activity of the irm. Thus, a irm with a strong inancial position is better placed in integrating manufacturing and processing of components and products than the one whose inancial position is weak. Similarly, availability of managerial expertise in the irm decides the range of manufacturing activity. Where a irm has executives with specialised skill and competence in a particular line of activity, it must recruit new executives with equal eficiency. It will, therefore, be prudent on the part of the production manager to consult the top management if the irm can afford the cost of new executives. The inance manager may also be involved in working out the cost-beneit implications of the decision. (b) choice of Manufacturing process: Selection of a suitable process in advance of the actual production of goods is another strategic decision that considerably inluences the success of an industrial enterprise. The design of the manufacturing process is not restricted to new concerns or new products. Existing enterprises have also to review their operations in the light of the competition in order to increase production at lower costs. Production process refers to the design of a series of operations to transform inputs into desired outputs. Process planning involves the following steps: 1. A-careful review of the product design and speciications to make sure that economic manufacture is feasible. 2. Determination of the methods of manufacture that will result in the optimum manufacturing cost. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 243 Formulation and Implementation of Strategy 3. Selection or development and procurement of all machines, tools, and other equipment required for the manufacture of the product at the required quality and rate of production. 4. Layout of the production area and auxiliary spaces and installation of the manufacturing facilities. 5. Planning for and establishing the necessary control of materials, machines and manpower to ensure the effective utilisation of the manufacturing facilities for economical production of the product. Thus, the process design activity comprises all such activities as are necessary to arrange for the manufacture of the product by the most economical means and in compliance with all safety regulations. (c) capacity Decisions: While considering a new plant design or the redesign or expansion of an existing system, a high level decision regarding the production capacity is called for. In order to determine future capacity of the plant adequate consideration should be given to certain factors such as sales forecasts of physical volume, policy decisions on what will be purchased instead of made, engineering estimates of machine productivity and production plans on how equipment will be used. Upon this must be super imposed central management policies regarding desired capacity including policies regarding provisions for peak versus normal requirements, backward taper of capacity provision for growth and balance of facilities. One of the most vital decisions which have to be made regarding production capacity is whether the company should build so much capacity to satisfy all demands during peak periods or whether it should maintain a smaller capacity and hope that failure to render service during requirements will not have unbearable consequences. Generally, companies providing utilities have a policy of building capacity to cope with peak demands (during hot summer days). But the investment made for peak demands is tremendous. In view of burgeoning amount of investment the moot question that arises is whether capacity installed in order to meet the maximum expected demand should be maintained at all times. It may not be disadvantageous to maintain the excess capacity throughout the year if one is conident that excess capacity can be utilised by expanding exports or by accumulating stocks if the duration of the surplus capacity is expected to be limited. There are some organisations who prefer to build smaller capacity to take care of normal requirements and meet peak demands by way of imports or subcontracting — some organisations employ measures such as off-peak discounts, mail early campaign, etc. to induce customers to avoid peak periods. Another way of meeting high peak demands is to switch over to two shifts from the single shift. Before making a inal decision in this direction, cost-beneits analysis must be undertaken. With doubling of shifts, investment costs are not halved because increments of capacity are not equally expensive. Many other costs are also involved. Wage premiums say 10 to 15 per cent, are generally given for second shifts. Multiple shifts also increase supervision costs. An analysis of building and equipment costs resulting from doubled shifts is necessary to determine the total additional cost. Additional cost should be matched with additional beneits. Where beneit exceeds costs it will be in the interest of the organisations to run double shifts to cope with peak demands. Adequate provision for coping with growth requirements of the organisation must be mace while determining production capacity. For this, it is necessary for the top management to decide how much growth is expected and the extent to which investment will be made in anticipation of growth. This decision will have to be taken very carefully otherwise it may result in too much or too little capacity in serious consequences. (d) choosing Machines and Equipment: Another strategic decision to be made by a production manager is what type of equipments the organisation will require for production purposes, how much it will cost, what will be its operating cost and what services it will render to the organisation and for how long. Choice of equipment for making a particular product essentially depends on the basic manufacturing process. The decision maker must, therefore, familiarise himself with the production process to be adopted. Another consideration in the choice of new equipment for a plant is the type and degree of operating skill required and presently available skills within the organisation. Other factors worth consideration are the ease with which the equipment, can be operated and the safety features of the equipment. 244 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT While deciding about the number of each type of machines needed to produce a product, producing engineer must take into account the quality of product to be made within any given period of time, number of working hours in the plant during this period, the various production rates on the operations to be performed, set-up time for each operation, number of set-ups per machine for the time period, the operating eficiency of the plant and inally the scrap loss during each operation. To ind the requirements for any particular piece of equipment in a process, the total number of hours per month (or other time period) that the equipment is required to produce the desired quantity is dividend by the total number of hours per month that the equipment is available, taking plant eficiency into consideration. Then the total requirements for all operations to be performed on each unit of equipment are considered in terms of the number of set-ups involved and the time required for each set-up. In a product-line layout of equipment, where each machine is set up to perform only one operation, the set-up time can be neglected, but the problem of line balancing becomes important. In the processtype layout, where machines are commonly used on several different parts and/or operations, set up and scheduling time losses must be carefully considered. Balancing is not a serious problem in such case. For balancing the capacities of various machines in a product-line layout, it may be desirable to buy more than enough machines if the equipment is not very expensive and if this will avoid possible shutdown or restriction of the entire manufacturing line. Where the equipment is quite costly, it may be necessary to provide only the minimum number of machines and rely upon overtime or extra-shifts to meet production requirements when breakdowns occur. (e) Equipment Investment: Acquisition of equipment involves capital expenditure which will have longterm effects on the inancial position of the company. Hence, before taking a inal decision regarding investment in a machine, detailed analysis of such investment in terms of cost-beneits must be made and its desirability and worthwhile ness should be evaluated with the help of internal rate of return or present value method. The decision to replace the existing machine is equally important to the enterprise. In this regard the management has to decide when the replacement should be made and what is the best replacement policy which must be considered while making comparisons between an existing unit of equipment and its possible replacement. In order to make a sound economic comparison, all the factors must be converted into cost considerations. Then, cost savings resulting from the proposed equipment must be related to incremental capital expenditure reducing the former in present value. The rate of return so obtained is compared with the cut-off rate to ascertain whether the replacement is economically viable. Thus, clear-cut policy guidelines regarding methodology or computation of net investment outlay, incremental operating expenditure and income depreciation, obsolescence, salvage value etc. will help management in taking decisions regarding acquisition and/or replacement of machines. (f) physical Facilities Decisions: Facilities strategy covers plans for location analysis and selection, design and speciications including layouts of equipment, plant, warehouses and related services specifying and providing for maintenance. Facilities planning deals with the separate but interrelated costs of material, supplies, manpower services and facilities. Its mission is to ind ways to minimise the aggregate of such costs in making and distributing the products at the proper time. plant location: Plant location is essentially an investment decision having long-term signiicance and implied economic effects. A good decision plays off; a bad decision can cause grim inancial dificulties. Once a plant is acquired, it is a permanent site that cannot readily be sold. The management may also contemplate relocation of the plant when business expansion and advanced technology require additional facilities to serve new market areas, to produce new products, or simply to replace the old, obsolete plants to increase the company’s production capacity. Before a location for a plant is sought, long range forecasts should be made anticipating the future needs of the company. These should be based on the company’s expansion policy, the anticipated diversiication of products, the trends in market demand, geographical distribution, material and labour supply, and any other foreseeable inluences. Thus, plant location decisions require intensive study of economic and socio-political circumstances. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 245 Formulation and Implementation of Strategy The accuracy of forecasting is essential regarding rising demand and anticipated sales increases. Miscalculation in this respect may post serious problems before the company can occupy the new facilities once built and expand the new facilities subsequently due to land and environmental constraints. The selection of an appropriate plant site calls for location study of the region in which the factory is to be situated, the community in which it should be placed and inally, the exact site in the city or countryside. plant building: Once the company has chosen the plant site, due consideration must be given to providing physical facilities. A company requiring extensive space will always construct new buildings. Oil planning a building for the manufacturing facilities, a number of factors will have to be kept in mind such as nature of the manufacturing process, plant layout and space requirements, lighting, heading, ventilating, airconditioning, service facilities and future expansion. plant layout: Plant layout involves the arrangement and location of production machinery, work centres and auxiliary facilities and activities (inspection, handling of material storage and shipping) for the purpose of achieving eficiency in manufacturing products or supplying consumer services. Plant layout should co-ordinate use of material, men and machines and achieve the following objectives: • Facilitate the manufacturing process, • Minimise materials handling, • Maintain lexibility of arrangement and operation, • Maintain high turnover of work-in-process, • Hold down investment in equipment, • Make economical vise of building cube, • Promote effective utilisation of manpower, • Promote for employee convenience, safety and comfort in doing the work. In designing plant layout a number of factors such as nature of product, volume of production, quality, equipment, type of manufacture, building plant site personnel and materials handling plan should be kept in view. Maintenance of Equipment: Maintenance of equipment is an important facility of planning consideration. It is intimately linked with replacement policies. Every manufacturing enterprise follows some maintenance routine in order to avoid unexpected breakdowns and thus minimise costs associated with machine breakdowns such as machine down time and possible loss of potential sales, idle direct and indirect labour, delays in other processes that may depend for material supply on the machine that is down, increased scrap, customer dissatisfaction from possible delays in deliveries and the actual cost of repairing the machine. A number of strategies can be adopted for maintenance of machines and equipment. Two most important ones are carrying excess capacity and preventive maintenance. In carrying excess capacity method an organisation carries stand-by capacity which is thrown into the breach if trouble occurs. This excess capacity can be whole machines or it can be major parts or components which ordinarily take time to obtain. Carrying excess capacity involves cost which mast be compared with costs arising out of a slow-down or a shut-down of a whole series of dependent operations. Therefore, the decision in this regard is cost trade-offs. The question that now arises is how much excess capacity should be carried by an organisation. This should be decided keeping in mind a fundamental principle that as the number of stand-bys increases, lost production costs decrease while holding costs for the stand-bys rise. The alternative providing the minimum total cost is preferred. preventive Maintenance: Preventive maintenance is based on the premise that good maintenance prevents breakdowns. Preventive maintenance means preventing break downs by replacing worn-out machines or their parts before their breakdown. It anticipates likely dificulties and does the expected needed repairs at a convenient time before the repairs are actually needed. Preventive maintenance depends upon the past knowledge that certain wearing parts will need replacement after a normal interval of vise. 246 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Another and quite different kind of preventive maintenance can better be called maintenance prevention. It is concerned with designing machines which will be both trouble-free and easily repaired. The most strategic decision which a production manager has to make in this regard is to determine whether preventive maintenance is more expensive than repairing on call. This requires comparison of total costs involved in preventive maintenance with those in repairing. There are more elaborate models for special maintenance problems such as an inspection policy for equipment that can be restored to an operating condition and replacement and policy for equipment renewed after a certain length of service. However, such sophisticated analyses are appropriate when the investment involved is large or service reliability is critical. A typical preventive maintenance strategy is more mundane than mathematical modelling. The guiding principle is that the time spent on preventive maintenance should be less than the time required for repairs, and the value imported to machines by preventive maintenance should exceed the programme cost. MARkETINg sTRATEgy MARkET: Market is an arrangement that provides an opportunity of exchange of goods and services, for money or money’s worth. It is the means to settle the terms of exchange. Marketing: Some important deinitions of marketing are: “Marketing is the performance of business activities that direct the low of goods and services from producer to consumer or user.” Another deinition of marketing “is getting the right goods and services to the right people at the right place, at the right time, at the right price, with right communication and promotion.” Marketing is “a social process by which individuals and groups obtain what they need and what through creating and exchanging products and value with others.” Marketing is, “the management function which organises and directs all those business activities involved in assessing and converting customer purchasing power into effective demand for a speciic product or service and in moving the product or service to the inal consumer or user so as to achieve the proit target or other objectives set by company. Marketing is the process of exchange involving two distinct aspects namely, mental and physical. In a macro sense, it is a system that directs an economy’s low of goods and services to consumers and accomplished society’s objectives. In a micro sense, it is the process of inding out what people need; helping to develop need satisiers, informing and persuading, moving properly priced products and services to consumers and keeping the consumers satisied. Role of Marketing: The irst and foremost role is that is stimulates potential aggregate demand and thus enlarges the size of the market. You might ask how it helps in the economic growth of a country. The answer is that through stimulation of demand people are motivated to work harder and earn additional money to buy the various ideas, goods and services being marketed. An additional advantage which accrues in the above context that it accelerates the process. (In India, it is believed that about one-fourth of GNP and more than one-third of agricultural output are still non-monetised). Another important role which marketing plays is that it helps in the discovery of entrepreneurial talent. Peter Drucker, a celebrated writer in the ield of management, makes this point very succinctly when he observes that marketing is a multiplier of managers and entrepreneurs. Still another important contribution which marketing makes is that it helps in sustaining and improving the existing levels of employment. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 247 Formulation and Implementation of Strategy Marketing Functions: Marketing involves eight important functions: Buying, Selling, Storage, Transportation, Financing, Standardisation, Grading and Risk-Taking. Marketing Environment: It is the sum-total of external factors within which the enterprise operates. It is the compendium of forces external in nature like social, economic, ethical, political, physical and technological. These are uncontrollable external forces that provide opportunities and challenges to the irm. universal Functions of Marketing: Universal functions of marketing consist of buying, selling, transporting, storing, standardisation and grading, inancing, risk-taking and market information. Marketing objectives: (i) Creating awareness and appreciation of the crucial role of consumer in shaping decisions, and of the proit as a basic foundation of corporate existence, stability and growth. (ii) Awareness that consumers can only be helped to solve their problems through corporate efforts. (iii) Awareness and concern with trans-departmental implications of an individual department’s decisions and actions and their effect on the irm’s equilibrium with its external environment— consumers, competitors, government, etc. (iv) Concern with, and interest in, the innovation of products and services so as to solve select consumer problems. (v) Concern with the effect of new product and service introduction on irm’s present and potential proit position. (vi) Sensing and monitoring information as regards market potential to serve as a base for goal and target setting. (vii) Focus in coordinating company effort and in establishing corporate and departmental objectives consistent with the enhancement of the irm’s proit position. (viii) Awareness and appreciation of the role of formal, periodic, short and long-range planning of company’s goals, strategies and tactics resulting in an integrated system of marketing actions. (ix) Desire and preparedness for the creation, expansion, contraction, termination, or in any way, restructuring of any corporate function in order to mobilize, utilize and control corporate effort. Marketing plan: Marketing plan is a written document that speciies in detail the irms marketing objectives and how marketing management will use the controllable marketing tools such as product design, channels, promotion and pricing to achieve these objectives. Marketing strategy means inding attractive opportunities and developing proitable ways to capture the market. A marketing strategy speciies a target market and a related marketing mix. It is a big picture of what a irm will do in some market. The job of planning strategies to guide a whole company is called strategic planning. It is the managerial process of developing and maintaining a match between an organisation’s resources and its market opportunities. The Marketing concept and the selling concept: The marketing concept is a business philosophy that challenges previous concepts. The marketing concept holds that the key to achieve organisational goals consists in determining the needs and wants of target markets and delivering the desired satisfactions more effectively and eficiently than competitors. The marketing concept has been expressed in many colourful ways: (i) meeting needs proitably 248 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT (ii) ind wants and ill them (iii) love the customer, not the product (iv) have it your way (v) you’re the boss (vi) to do all in our power to pack the customer’s rupee full of value, quality and satisfaction. The marketing concept rests on four main pillars, namely target market, customer needs, coordinated marketing and proitability. These are shown in the igure below, where they are constructed with a selling orientation. The selling concept takes an inside-out perspective. Starting point Focus Means Factory Products Selling and Promoting Ends Proits through Sales volume The Selling Concept Target Market Customer needs Co-ordinated Marketing Proit through customer satisfaction The Market Concept The selling and marketing concepts contrasted It starts with the factory, focuses on the company’s existing products, and calls for heavy selling and promoting to produce proitable sales. The marketing concept takes an outside-in perspective. It starts with a well-deined market, focuses on customer needs, co-ordinates all the activities that will affect customers and produces proit through customer satisfaction. Most companies do not really grasp or embrace the marketing concept until driven to it by circumstances. Any of the following developments might produce them: (i) sales decline (ii) slow growth (iii) changing buying patterns (iv) increasing competition (v) increasing marketing expenditure. In the course of converting to a market oriented company, a company will face three hurdles-organised resistance, slow learning and fast forgetting. But, since the marketing concept is concerned with how the business conduct itself, the application of the marketing concept to management decisions should begin at the strategic planning stage, and continue through product development and testing to its eventual sale in the market, and after sales services, in other words, throughout the value chain. social Markeing: Societal marketing concept calls for a customer orientation backed by integrated marketing aimed at generating customer satisfaction and long-run consumer welfare as the key to attaining long-run proitable volume. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 249 Formulation and Implementation of Strategy The impotance of developing a market orientation in strategic planning: The marketing concept is the most practical philosophy for achieving any commercial organisation’s objective such as growth in proits. (i) By applying the marketing concept to product design etc. the company might hope to make more attractive products, hence to achieve sustained sales growth and so make higher proits. (ii) The importance, to some irms, of building up a long-term relationship with customers. Proits do not only come from individual transactions with customers, but also from the customer’s propensity to deal with the irm rather than its competitors. The importance of developing a market orientation to strategic planning is implicit in the marketing concept. (i) With the product concept and selling concept, an organisation produces a good or service, and then expects to sell it. The nature of the organisation’s business is determined by what it has chosen to produce, and there will be a reluctance to change over to producing something different. (ii) With the marketing concept, an organisation commits itself to supplying what customers need. As those needs change, so too must the goods or services which are produced. In other words, marketing orientation enables a irm to adapt to the environment. Strategic planning involves making decisions about the choice of product-market strategies- developing new products and new markets that will ill the proit gap. A marketing orientation should help planners to identify more successfully what products or markets, by meeting perceived customer needs, would earn good proits for the organisation. Having decided on a competitive strategy and a product-market strategy portfolio and a sales growth plan, a irm must then decide on the following: (i) Which markets offer the opportunity for successful investment? In other words, if the strategy is diversiication, which new markets should be looked at? (ii) From these, which target markets should be selected for development. (iii) How the irm should offer its product or service in comparison with the offerings of competitors. (iv) How to establish a marketing system and organisation for the irm. (v) How to develop a marketing plan and then implement and control it. Strategic marketing is concerned with the development and implementation of marketing plans, for both the long term and short term, which should enable a irm to achieve its objectives and goals. A irm can apply this as follows: (i) Environmental opportunities exist anywhere in the environment, e.g. in the ield of what type of goods and services. Not all environmental opportunities are appropriate to the objectives of a single irm. (ii) Any company is likely to have distinctive competence in one or more areas of activity which makes it more likely than other companies to be able to take advantage of a certain environmental opportunity. Marketing Management: Marketing management is the crucial and creative task of delivering consumer satisfaction and thereby earning, proits through consumer demand. Marketing strategies: Marketing strategy is a process that can allow an organisation to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage. A marketing strategy should be centered around the key concept that customer satisfaction is the main goal. Markets can be described and deined by their nature of competition. Basically, the company’s overall marketing strategy is its competitive posture in the marketplace. The marketer’s irst task is to select a promising market arid identify its needs and buying patterns, after which he formulates strategies for each controllable factor (product, distribution, promotion and pricing). 250 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Management’s mission is to manipulate the controllable in terms of the uncontrollable in ways that both meet the target market needs and facilitate achievement of the company’s overall goals. To accomplish this, management uniies the product market, distribution, promotion and pricing strategies into an overall marketing strategy (i.e., into a deliberately planned competitive posture). In marketing, many decisions are made—each seemingly independent, all, in fact, interrelated. Thus, if a marketer changes the product’s price by a substantial amount, other parts of the company’s overall marketing strategy need re-evaluation. Ultimately, marketing success depends on skill in maintaining an optimum combination of strategies, which is in keeping overall marketing strategy in balance. In formulating and implementing overall marketing strategy, management concerns itself with identifying opportunities to serve target markets proitably and serving them so effectively that it is dificult for competitors to take business away on a proitable basis. Competitive postures are either aggressive or defensive. When a market’s products are already established in the market, there is a strong temptation to adopt a defensive posture, i.e., to maintain a holding action. The danger in defending the status-quo is that this means yielding the initiative to competitors. If the competitors develop important product innovations, they may succeed in breaking established customer loyalty and buying patterns. The importance of formalized overall marketing strategies (i.e., deliberately planned competitive postures) varies with the competitive setting. There are four types of competitive settings. 1. No direct competition 2. Pure competition 3. Monopolistic competition 4. Oligopolistic competition Formulating overall Marketing strategy: A marketing strategy should be used as a working paper that guides the store’s operations for the next 1-2 years. The format of a marketing strategy has three sections: Basic assumptions -- based on survey results and past planning processes; Strategic goals -- goals for growth and iscal health of the co. Achieving goals -- operational ideas for changes that will alter the perception of the storefront by the public to conform to the strategic goals. Formulation of overall marketing strategy requires integration of all dimensions of marketing effort. Ideally, the marketer should have some concrete system for determining whether the combination of inputs going into the overall marketing strategy is optimal, and therefore, whether the resulting proit (and other desired outputs, in terms of the company’s goals) is also optimal. The systematic approach is one requiring evaluation of possible inputs in overall marketing strategy in terms of the likely outputs. Selections are then made from the various inputs so that the combination (i.e., the overall marketing strategy) has the best chance for achieving the desired outputs. In order to be consistently and proitably customer oriented in a continuously changing market, what is needed is a proper marketing strategy concerning target markets, marketing mix and marketing expenditure levels. Thus, a viable it is achieved among corporate objectives, available resources, skills and opportunities. The strategic planning process is carried out at corporate, business and product levels. Strategic planning involves repeated cycles of analysis, planning, implementation and control. The horizons of strategic plans are usually larger—usually 1-5 years. Corporate strategic planning involves four planning activities: (a) Developing a clear mission for the company in terms of its industry, product &competence. (b) Identifying the company’s Strategic Business Units (SBUs) which can beneit from separate planning and be managed as separate proit centres. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 251 Formulation and Implementation of Strategy (c) Allocating resources to SBUs based on their market attractiveness and business strength, or market growth rate and Relative Market Share matrix. The two most important portfolio models are Boston Consulting Group (BCG) model and General Electric (GE) model. Careful use of the portfolio models helps in isolating SBUs to be built, maintained, harvested or divested. (d) Expanding present business and developing new ones to ill the strategic planning gap: The company can identify opportunities by considering intensive growth (market penetration, market development and product development), integrative growth (backward, forward and horizontal integration) and diversiication (concentric, horizontal and conglomerate diversiication). SBUs determine their own business, product and services strategies considering the business mission, external and internal environment. Marketing strategy provides the context for marketing planning with a much smaller horizon, usually up to 1 year. Manpower strategy: The concept of Human Resource Development (HRD) has evolved over time with the recognition of people employed in organisations as a resource. In a comprehensive sense, HRD is deined as a process by which employees are encouraged and helped in a continuous and planned way to (a) acquire and sharpen capabilities to perform functions relating to their present or future positions, (b) develop their general abilities as individuals, (c) identify and make use of their own inner potentials for their own and/or organisational purposes and (d) develop an organisational culture whereby superior-subordinate relations, team work and collaboration among sub-units may lead to strengthening healthy work ethos, motivation and pride of employees. Strategic management of human resources includes assessing stafing needs in the light of strategies formulated and developing a stafing plan for implementation of strategy. The compensation and incentive payments necessary to motivate technically skilled employees and managers also need to be kept in view in connection with the stafing plan. The basic policy in that respect is to be that of linking corporate earnings with individual beneits. Implementation of strategy often requires changes to be initiated in the organisation structure which may lead to changes in power-relations and scope of social interactions among members. The managers and employees are subjected to changes in their roles, prerogatives and power. New values and priorities as well as the newly formed work groups and informal groups may lead to behavioural resistance to desired improvements. Hence there is necessity of guidelines being provided to facilitate strategy implementation and improve human relations. There are ways and means to ensure that managerial attitudes and roles match the required strategy implementation efforts. Managers may be transferred to new positions offering scope of career development, promotions, job enlargement and enrichment. Besides workshops may be held aimed at leadership development. Indeed it is considered important that managerial values, skills and abilities required for implementing strategy should be kept in view at the strategy formulation stage itself. The statements issued by Executives should also relect their personal commitment to strategy implementation as well as convey their support and rewards for achieving the strategic goals. The style of management and supervision may require stress on subordinates’ involvement in decision-making as much as possible with suitable rewards for valuable suggestions. Basically, the effectiveness of human resource management in the implementation of strategy is achievable through human resource planning, recruitment and selection of staff, training, appraisal of performance and compensation policy. The purpose of HRM strategy is to relect and facilitate the achievement of corporate-level strategy by linking the functions of HRM with the strategic goals and objectives—securing competitive advantage either as a cost or price leader or through the unique and differentiated nature of its product, at the same time fostering the development of an appropriate organisational culture. The following aspects of human resource strategy are required to be focused for the purpose: - Job analysis and human resource planning before selection and recruitment of manpower, 252 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT - Recruitment and selection of staff with required skill and abilities with the process being consistent with the objectives, - Human resource development by way of training and development programmes, performance appraisal, appropriate compensation package and incentive schemes to secure motivation. The more important features which human resource strategy may bring to bear on the organisation are as follows: (i) orientation of the members. HRM strategy has to ensure that individuals employed in the organisation have necessary orientation so that the mission and objectives of the organisation are internalised by the members and they have a sense of identiication with the values and culture of the organisation. (ii) Facilitation of organisational changes as and when called for. The practices and procedures are required to be in conformity with the changing internal and external conditions. This is a vital role of HR strategy management. (iii) coping with diversity of workforce. Modern organisations with highly complex nature of jobs and processes generally have a highly diversiied workforce differentiated in terms of age, sex, religion, professional and technical skills and educational background. To maintain a balanced workforce with harmonious relations and providing equitable incentives and rewards are aspects of HRM functions which can sustain an effective workforce. This is a responsibility of HR strategy managers. (iv) Maintaining competent and committed workforce in a competitive environment. The intensity of market competition for enterprises has been growing fast with globalisation and liberaliation of economic policies. There are competitive strategies of low cost production and differentiation of products which may enable companies to secure a competitive edge. HRM has the responsibility of managing workforce so as to make it competent in ability as well as committed to organisational success. (v) Development of core competency. An enterprise succeeds in achieving its strategic objectives mainly on the basis of capabilities in the technical, marketing or human skills in areas of crucial importance. These are known as core competencies of the organisation which are unique internal strengths not possessed by competitors. HRM is required to undertake building up of core competency by the organisation as to secure dynamic leadership in the product market. (vi) Empowered workforce as an active resource. HR strategy is best managed when the members of an organisation are individually in control of their work and are able to realise their potentials with empowerment to take relevant decisions on their own. This is likely to secure enduring performance based achievements. (vii) Appropriate work culture and ethical norms. No organisation can get the best contribution from its members unless individuals develop a liking for challenging jobs and follow the ethical norms of the organisation functionally. This may require redesigning of jobs and work processes as well as developing trust and conidence among individuals and work groups, as also emphasising intrinsic motivation for improving performance. HRM encompasses creation of an appropriate work culture on the above lines. Human resource strategic management is concerned with the people dimension of management. Since enterprise is a system of people who interact, it has to depend upon the people. Organisational success and survival, therefore, largely depend on how the people in the organisation will perform, i.e. on how human resources are managed. How does an organisation identify the types of people it needs and then convince them to join? What does it take to train them, to evaluate their performance, and to encourage them to stay with the organisations and contribution to its objectives? All these tasks fall within the realm of human resource strategic management. The overall objective of human resource strategic management is to strike best match between people and organisation in order to contribute to the successful survival and growth of the organisation and help the people in achieving satisfaction of their economic and other needs. So as to accomplish this objective human resource manager has to perform four strategic functions, viz., acquisition, development, motivation and maintenance. Effective performance of these functions is inevitable in order to cope with bewildering complexity and paroxysm of business activity, technological advancement, increasing ferocity of competition, problem of low productivity and high cost and cataclysmic changes in socio-cultural environment leading to change in proile of workers, OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 253 Formulation and Implementation of Strategy their style of functioning, attitude towards management, towards work and themselves. This is possible only if fruitful alliance between corporate strategy and human resource management is made uniting the organisation’s direction with that of its employees. Human resource manager has to strategise human resource function so that its various components are harmonised irmly with corporate strategy towards improving productivity, quality and customer satisfaction. While designing strategy to motivate employees, the management must bear in mind the following cardinal principles: (a) All reasonably healthy adults have a considerable reservoir of potential energy. Differences in the total amount of potential energy are important determinants of motivation. (b) All adults have a number of basic motives which can be thought of as values or outlet that channel and regulate the low of potential energy from this reservoir. (c) Most adults within a given socio-cultural system may have the same set of motives or energy outlets that channel and regulate the low of potential energy from this reservoir. (d) Actualisation of motive depends on speciic situation in which a person inds himself. (e) Certain characteristics of a situation arouse or trigger different motives, opening different values or outlets. Each motive or energy outlet is responsive to a different set of situational characteristics. (f) Each motive leads to a different pattern of behaviour. (g) By changing the nature of the situational characteristics or stimuli, different motives are aroused or actualised resulting in the emerging of distinct different patterns of behaviour. There are several strategies for motivating organisation members. Each strategy is aimed at satisfying people’s needs through appropriate organisational behaviour. Some of these strategies are discussed below: 1. Managerial communication: The most important and basic strategy for a manager is simply to communicate well with the organisational people. This satisies such basic human needs as recognition, a sense of belonging, and security. For example, such a simple action as a manager’s attempting to become better acquainted with subordinates can contribute substantially to the satisfaction of each of these three needs. As another example, a message from a manager to a subordinate that praises the subordinate for a job well done can help satisfy the subordinate’s recognition and security needs. 2. Theory X and Theory y: Another motivation strategy involves manager’s assumptions about the nature of people. Douglas McGregor identiied two sets of assumptions. According to him, Theory X involves negative assumptions that managers often use as the basis for dealing with people. Theory Y represents positive assumptions which managers strive to use. The basic rationale for using Theory Y rather than Theory X in most situations is that managerial activities relect Theory X assumptions. As such, the activities based on Theory Y assumptions generally are more successful in motivating organisation people than those based on Theory X assumptions. 3. Job Design: A third strategy managers can use to motivate organisation members involves the design of jobs that organisation members perform. Earliest attempt to overcome job boredom was job rotation in which individuals are moved from job to job and thus they are not required to perform a particular job for over the long-term. Subsequently, job enlargement is another strategy developed to overcome the boredom of more simple and specialised jobs. Job enlargement involves increasing the number of operations an individual performs and thereby increasing the individual’s satisfaction in work. Job enlargement programme have been found more successful in increasing job satisfaction than have job rotation programmes. In recent years, two other job design strategies, viz., Job Enrichment and Flexitime, have been evolved. Job enrichment is the process of incorporating motivators into a job situation. The job content can be enriched in terms of providing higher responsibility, opportunity for achievement, opportunity for recognition, advancement and learning opportunities. Another more recent job design strategy for motivating organisation members is based on a concept called lexitime or lexible working hour’s programmes. The major thrust of this strategy is that it permits workers to choose own working hours within hours within certain limitations. The choices of starting 254 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT and inishing times can be as lexible as the organisation allows, to ensure that lexibility does not become counter-productive within the organisation, many lexitime programmes include a core period during which all employees must be on the job. Flexitime strategy has been found resulting in greater job satisfaction which typically results in greater productivity. It can also result in higher motivation levels of workers. This may enable the management in recruiting and attracting qualiied employees. 4. Behaviour Modiication: Behaviour modiication is another strategy which can be used to motivate members of an organisation. Behaviour modiication focuses on encouraging appropriate behaviour as a result of the consequences of that behaviour. According to the law of effect, behaviour that is rewarded tends to be repeated and behaviour that punished tends to be eliminated. Behaviour modiication strategy emphasises on ensuring that appropriate consequences occur as a result of that behaviour. Positive reinforcement is a desirable cosequence of behaviour, and negative reinforcement is the elimination of an undesirable consequence of behaviour. If a worker’s arriving on time is positively reinforced, or rewarded, the probability increases that the workers will arrive on time more often. In addition, if the worker experiences some undesirable outcome on arriving late for work, each as a verbal reprimand the worker is negatively reinforced when this outcome is eliminated by on-time arrival. Both positive reinforcement and negative reinforcement are both rewards that increase the likelihood that behaviour will continue. Punishment is the presentation of an undesirable behaviour consequence or the removal of a desirable behavioural consequence that decreases the likelihood of the behaviour continuing. Managers, for example, could punish employees for coming late for work by exposing them to some undesirable consequence. Such as verbal experiment, or by removing a desirable consequence, such as their wages for the amount of time they are late. Although this punishment probably would quickly cause workers to come to work on time, it might be accompanied by undesirable side effects, such as high levels of absenteeism and turnover, if it were emphasised over the long-term. In order to make behaviour modiication programmes successful, it is necessary to give different levels of rewards to different workers depending on the quality of their performance, telling workers what they are doing wrong, punishing workers privately so as to avoid any embarrassment to them and always give rewards and punishments when earned to emphasise that management is serious about behaviour modiication efforts. 5. participative Management: Another strategic approach to employee’s motivation is to adopt the system of involving employees in decision making. This will elicit employee’s commitment in executing decisions. Further, the successful process of making a decision, executing it and then seeing the positive consequences can help satisfy one’s need for achievement, provides recognition and responsibility and enhance self esteem. Maintenance aspect of human resources is concerned with creation and maintenance of such working conditions in the organisation as are necessary to attract the most talented people, retain them and motivate them to give their best. For this purpose, existing system of grade salary structure, ixed annual increments and automatic adjustments to inlation has to be replaced by performance linked reward system. Under the new system, employee’s reward will be linked to the corporate objectives by pegging it to the employees’ contribution towards achieving them. Time has come to develop a comprehensive reward system that splits employees’ compensation between company standards, individual merit and team performance. Individual reward system based on attainment of functional speciic targets bearing no relationship to corporate performance should give way to team based reward system which peggs rewards of entire manpower of the business division to the achievement of its goals. 10.2 sTRucTuRINg oF oRgANIZATIoN FoR IMplEMENTATIoN oF sTRATEgy Introduction Strategy implementation is a critical issue. Strategies remain useless unless they are effectively implemented. Strategy implementation requires a suitable organizational structure to translate the strategies into concrete action plans. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 255 Formulation and Implementation of Strategy WHAT Is sTRATEgIc IMplEMENTATIoN? • Sreiner, Miner and Gray: “Implementation of strategies is concerned with the design and management of systems to achive the best integration of people, structures, processes, and resources in reaching organisational purposes. • Glueck: “Strategic implementation is the assignment or reassignment of corporate and SBU leaders to match the strategy. The leaders will communicate the strategy to the employees. Implementation also involves the development of functional policies about the organisation structure and climate to support the strategy and help achieve organisational objectives. • Harvey: “Implementation ............. involves actually executing the strategic gameplan. This includes setting policies, designing the organisation structure, and developing a corporate culture to enable the attainment of organisational objectives.” strategic Implementation Strategy is dependent on many variables – Internal as well as external. All factors are interrelated. Mckinsey’s 7-S Framework The Mckinsey Company, a well known management consultancy irm in the United States, towards the end of 1970s was asked to ind a solution to this knotty issue. The researchers Peters and Waterman found after examining America’s best run companies that the problem in strategy lay in its implementation and structure was only one lever in the hands of management. The other levers were systems, staff, style, skills and superordinate goals. A strategy is usually successful when the other S’s in the 7-S framework it into or support the strategy. • Strategy: A set of decisions and actions aimed at gaining a sustainable competitive advantage. • Structure: The organisation chart and associated information that shows who reports to whom and how tasks are both divided and integrated. • Systems: The low of activities involved in the daily operation of a business, including its core processes and its support systems. • Style: How managers collectively spend their time and attention and how they use symbolic behaviour. How management acts is more important than what management says. • Staff: How companies develop employees and shape basic values. • Shared Values: Commonly held beliefs, mindsets and assumptions that shape how an organisation behaves— its corporate culture. • Skills: An organisation’s dominant capabilities and competencies. 256 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT organizational structure The successful implementation of Strategy requires an effective organization structure. Organizational structure means the framework in which the organization deines how tasks are divided, resources are deployed and departments are co-ordinated. There are several types of organizational structure: (1) Functional Structure (2) Geographic Structure (3) Matrix Structure (4) Hybrid Structure Functional structure: The functional structure is characterized by the simultaneous combination of similar activities and the separation of dissimilar activities on the basis of function. All Cost Accountants are located in the Cost Accounting Department, and the HOD of Cost Accounting is responsible for all cost related activities. The same is true in marketing, research and development, and manufacturing. The functional organization form is one of the most common organizational structures found in irms pursuing strategy of concentration or very high relatedness. A functional structure is most appropriate when the organization is small to medium size and relatively stable. geographic structure: Another basic form structural grouping is geographic structure, in which activities and personnel are grouped by speciic geographic locations. Each geographic unit includes all functions required to produce and market products in that region. Organization according to geographic areas or territories is rather common structural form for large-scale enterprise whose strategies need to be tailored to it the particular needs and features of different. Matrix structure: Another way to achieve focus on multiple outcomes is with the matrix structure. The matrix structure creates a dual chain of command; two lines of budget authority and two sources of performance and reward. The key feature of the matrix is that product (or business) and functional lines of authority are overlaid to form a matrix or grid, between the product manager and functional manager. Hybrid organization And supplemental Methods: A single type of structural design is not always suficient to meet the requirements of strategy. When this occurs, one opinion is to mix and blend the basic organizations forms, matching structure to strategy, requirement by requirement, and unit by unit, Hybrid structure is a form of departmentalization that adopts parts of both functional and divisional structures at the same level of management. The major potential advantage of the hybrid structures is that the combination may allow the irm to gain the advantages offered by the primary structure while at least diminishing the impact of the disadvantages. organizational structure and strategy Implementation: The choice of structure appears contingent on the strategy of the irm. No single structure is appropriate for implementing strategies. The principal task of the organization to choose a suitable structure so that the various elements of an organization it together and make logical sense. strategy Implementation: Views of Experts • Steiner and Miner: “The implementation of policies and strategies is concerned with the design and management of systems to achieve the best integration of people, structures, processes and resources in reaching organisational purposes.” OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 257 Formulation and Implementation of Strategy • Glueck: “Strategic implementation is the assignment or reassignment of corporate and SBU leaders to match the strategy. The leaders will communicate the strategy to the employees. Implementation also involves the development of functional policies about the organisation structure and climate to support the strategy and help achieve organisational objectives”. • Harvey: “Implementation involves actually executing the strategic gameplan. This includes sotting policies, designing the organisation structure, and developing a corporate culture to enable the attainment of organisational objectives.” 10.3 sTRATEgy busINEss uNIT (sbu) SBU groups similar divisions into “Strategic Business Units” and then delegate’s authority and responsibility of each unit to a senior executive who is normally identiied as CEO or MD of that SBU. It is an extension of Divisional structure. SBU Structure sbu structure Big organisation like Unilever, etc have many SBUs for their different categories of products like Cosmetics, Food products and Beverages, etc, and each is managed through separate unit head. Advantages: (i) Promotes accountability since units’ heads are responsible for individual SBU proitability (ii) Career development opportunities are further higher in this structure (iii) Allow better control of categories of products manufacturing, marketing and distributions (iv) Helps to expand in different related and unrelated businesses Disadvantages: (i) May provide inconsistent approach to tackle customers, etc, because each unit may work in it’s own way to handle situations (ii) High cost approach Matrix organisation structure: The above structures (Functional, Divisional and SBU) consist of low of authority from top to bottom i.e. vertical low whereas Matrix structure contains both vertical and horizontal low of communications or authority. This type of structure is frequently used in IT organisation for managing different projects. Each individual project is managed by a project manager and projects manager will have his team arranged under him. 258 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Advantages: (i) Useful for some speciic industries like Information Technology, Healthcare etc. (ii) Employee can see visible results of their efforts (iii) Remove barrier to communications (iv) Managing projects are easy (v) Effective structures when environment is very dynamic Disadvantages: (i) Complex structure as this contains both vertical and horizontal low of information (ii) High cost approach due to more management positions (iii) Dual lines of authority (iv) Conlicts arises in the allocation of resources strategic business units (sbu) & core competence: • SBU is a grouping of related businesses, which is open to complex planning treatment. • Multi-business enterprise groups it’s various businesses into a few distinct business units in a scientiic way known as SBUs. • The purpose is to provide effective strategic planning treatment to each one of it’s products /businesses. • SBU concept is relevant to a multi-product, multi-business enterprises like Unilever Limited • In other words, the SBU concept helps a multi-business corporation in scientiically grouping it’s businesses into a few distinct business units. Such a grouping would in it’s turn, help the corporation to carry out it’s strategic management practices in better manner. Some of major reasons of using SBU approach are as follow: • A scientiic method of grouping the businesses of a multi-business corporation which helps the irm in strategic planning. • An improvement over the geographical grouping of businesses and strategic planning based on locational units. • An SBU is a grouping of related businesses that can be taken up for strategic planning distinct from the rest of the businesses. • Grouping the businesses on SBU lines helps the irm in strategic planning by removing the ambiguity and confusion generally seen in grouping businesses. • Each SBU is a separate business from the strategic planning standpoint. In the basic factors, viz., mission, objectives, competition and strategy-one SBU will be distinct from another. • Each SBU will have it’s own distinct set of competitors and it’s own distinct strategy. • Each SBU will have a CEO. He will be responsible for strategic planning for the SBU and it’s proit performance; he will also have control over most of the factors affecting the proit of the SBU. The three most important characteristics of sbu are: • It is a single business or a collection of related businesses which offer scope for independent planning and which might feasibly stand alone from the rest of the organisation. • Has it’s own set of competitors. • Has a manager who has responsibility for strategic planning and proit performance, and who has control of proit-inluencing factors. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 259 Formulation and Implementation of Strategy 10.4 busINEss pRocEss RE-ENgINEERINg business process re-engineering (bpR) is a business management strategy, originally pioneered in the early 1990s, focusing on the analysis and design of worklows and processes within an organization. BPR aimed to help organizations fundamentally rethink how they do their work in order to dramatically improve customer service, cut operational costs, and become world-class competitors. In the mid-1990s, as many as 60% of the Fortune 500 companies claimed to either have initiated reengineering efforts, or to have plans to do so. BPR seeks to help companies radically restructure their organizations by focusing on the ground-up design of their business processes. According to Davenport (1990) a business process is a set of logically related tasks performed to achieve a deined business outcome. Re-engineering emphasized a holistic focus on business objectives and how processes related to them, encouraging full-scale recreation of processes rather than iterative optimization of subprocesses. Business process re-engineering is also known as business process redesign, business transformation, or business process change management. The globalization of the economy and the liberalization of the trade markets have formulated new conditions in the market place which are characterized by instability and intensive competition in the business environment. Competition is continuously increasing with respect to price, quality and selection, service and promptness of delivery. Removal of barriers, international cooperation, technological innovations cause competition to intensify. All these changes impose the need for organizational transformation, where the entire processes, organization climate and organization structure are changed. Hammer and Champy provide the following deinitions: Reengineering is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance such as cost, quality, service and speed. process is a structured, measured set of activities designed to produce a speciied output for a particular customer or market. It implies a strong emphasis on how work is done within an organization. “ (Davenport 1993). Each process is composed of related steps or activities that use people, information, and other resources to create value for customers as it is illustrated in the following example. principle of bpR BPR is achieving dramatic performance improvements through radical change in organizational processes, rearchitecting of business and management processes. It involves the redrawing of organizational boundaries, the reconsideration of jobs, tasks, and skills. This occurs with the creation and the use of models. Whether those be physical models, mathematical, computer or structural models, engineers build and analyze models to predict the performance of designs or to understand the behavior of devices. More speciically, BPR is deined as the use of 260 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT scientiic methods, models and tools to bring about the radical restructuring of an enterprise that result in signiicant improvements in performance. Redesign, retooling and reorchestrating form the key components of BPR that are essential for an organization to focus on the outcome that it needs to achieve. The outcome pursued should be an ambitious outcome (as for instance, are a 24 hour delivery to any customer anywhere in the world, approval of mortgage loans within 60 minutes of application, or ability to have on-line access to a patient’s medical records no matter where they are in any major city in the world). These types of visionary goals require rethinking the way most organizations do business, careful redesign. They will additionally need very sophisticated supporting information systems and a transformation from a traditional organizational structure to a network type organization. In resuming, the whole process of BPR in order to achieve the above mentioned expected results is based on key steps-principles which include redesign, retool, and reorchestrate. Each step-principle embodies the actions and resources as presented in the table below. REDEsIgN • • • • • • Simplify Standardize Empowering Employeeship Groupware Measurements RETool • • • • REcoRcHEsTRATE Networks intranets extranets Work Flow • n n n synchronize process IT human resources The 3 Rs of re-engineering Creating the new enterprise involves considerable change in virtually everything to do with people’s working lives. Rather than ixing the old, we set out to create the new. There is a fundamental transformation occurring in business - in terms of its structure, processes, people, and technology. The table following presents the changes in that occur in the business under BPR. changes in the World of Work From conventional To bpR Functional departments Process Teams Simple tasks (division of labor) Empowered employees Controlled people (by management) Multidimensional work Training of employees Education of employees Compensation for skill and time spent Compensation for results Pay raises based on promotions and seniority Low pay plus high performance-related bonuses Advancement based on ability Advancement based on performance Protective organizational culture Productive organizational structure Managers supervise and control Managers coach and advise Hierarchical organizational structure Horizontal (lat) structure Executives as scorekeepers Executives as leaders Separation of duties and functions Cross-functional teams Linear and sequential processes Parallel process Mass production Mass customization source: Based on Hammer and Champy, 1993. In resuming, the whole process of BPR in order to achieve the above mentioned expected result is based on key step-principles which include redesigning, retooling and reorchestrating. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 261 Formulation and Implementation of Strategy Methodology of a bpR project implementation / alternative techniques BPR is world-wide applicable technique of business restructuring focusing on business processes, providing vast improvements in a short period of time. The technique implements organizational change based on the close coordination of a methodology for rapid change, employee empowerment and training and support by information technology. In order to implement BPR to an enterprise the followings key actions need to take place: • Selection of the strategic (added-value) processes for redesign. • Simplify new processes - minimize steps - optimize eficiency -(modeling). • Organize a team of employees for each process and assign a role for process coordinator. • Organize the worklow - document transfer and control. • Assign responsibilities and roles for each process. • Automate processes using IT(Intranets, Extranets, Worklow Management) • Train the process team to eficiently manage and operate the new process • Introduce the redesigned process into the business organizational structure Most reengineering methodologies share common elements, but simple differences can have a signiicant impact on the success or failure of a project. After a project area has been identiied, the methodologies for reengineering business processes may be used. In order for a company, aiming to apply BPR, to select the best methodology, sequence processes and implement the appropriate BPR plan, it has to create effective and actionable visions. Referring to ‘vision’ we mean the complete articulation of the future state (the values, the processes, structure, technology, job roles and environment) For creating an effective vision, basic steps are mentioned below. • the right combination of individuals come together to form an optimistic and energized team • clear objectives exist and the scope for the project is well deined and understood • the team can stand in the future and look back, rather than stand in the present and look forward • the vision is rooted in a set of guiding principles. All methodologies could be divided in general ‘model’ stages: The Envision stage: the company reviews the existing strategy and business processes and based on that review business processes for improvement are targeted and IT opportunities are identiied. The Initiation stage: project teams are assigned, performance goals, project planning and employee notiication are set. The Diagnosis stage: documentation of processes and sub-processes takes place in terms of process attributes (activities, resources, communication, roles, IT and costs). The Redesign stage: new process design is developed by devising process design alternatives and through brainstorming and creativity techniques. The Reconstruction stage: management technique changes occur to ensure smooth migration to the new process responsibilities and human resource roles. The Evaluation stage: the new process is monitored to determine if goals are met and examine total quality programs. Expected Results / Beneits The expected results for a company that implements business process reengineering are the following: • Reallocation of jobs and processes so as to be combined into fewer, to be executed in natural order, simultaneously and by the least possible number of employees. • Reorganization of the company’s structure (downsizing) and employee empowerment. 262 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT • Jobs and processes become lexible so as to be executed according to the needs of each case, company’s and customer’s need’s (hybrid centralized/decentralized operations) The above changes will bring reductions of costs in the company, better quality (as far as price, promptness of delivery and offerings of related services) in the products and services provided to the customers. BPR shows that there is ‘more than one way to skin a cat’ and enables a fresh view without ingrained prejudice affecting judgement. It can produce huge initial savings where a business is struggling and often has the affect of turning around an unproitable operation. Also, it leaves the business with a fully documented model of the operation, which is invaluable if embarking on a quality programme. The expected outcome from a successful BPR process should the desired one for the favor of the business concerned. The dramatic changes that are caused involve people’s jobs and working relationships as it is very often that jobs are eliminated and the entire process is not as beneicial for all. Types of irms / organizations that BPR can be applied BPR could by implemented to all irms (manufacturing irms, retailers, services, etc.) and public organizations that satisfy the following criteria: • Minimum Number of employees: 20 (at least 4 in management positions). • Strong management commitment to new ways of working and innovation. • Well formed IT infrastructure. Business Process Reengineering could be applied to companies that confront problems such as the following: • High operational costs • Low quality offered to customers • High level of ‘’bottleneck” processes at pick seasons • Poor performance of middle level managers • Inappropriate distribution of resources and jobs in order to achieve maximum performance, etc. self learning Questions: 1. Critically comment on “Augmented Marketing is provision of traditional customer services and beneits.” 2. Critically comment on “Manpower strategy aids in Strategic Management.” 3. Discuss McKinsey’s 7-S framework. 4. Discuss in brief Structuring of organisation for implementation of strategy. 5. List down various types of organisational structure. 6. What are the areas to keep in mind while framing Production Strategy? 7. Write a short notes on A. Strategic Business Unit B. Business Process Re-engineering 8. List down the steps required in implementation of Strategy. 9. Bring out the features and advantages of SBU. 10. Write short notes on Marketing Mix. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 263 Strtegic Managment – Objective Questions and Answers obJEcTIVE TypE QuEsTIoNs & ANsWERs choosing of correct Answers: 1. A corporate strategy can be deined as : (a) A list of actions about operational planning and statement of organisation structure and control system; (b) A statement of how to compete, direction of growth and method of assessing environment; (c) Abatement of organisation’s activities and allocation of resources; (d) A course of action or choice of alternatives, specifying the resources required to achieve certain stated objectives; (e) A statement of where and how the company will prefer to operate. Answer: (d) A corporate strategy can be deined as: a course of action or choice of alternatives, specifying the resources required to achieve certain stated objectives. 2. Strategic analysis is concerned with stating the position of the organisation in terms of: (a) Mission, choice of market segments, product selection, inancial targets, external appraisal; (b) Mission, goals, corporate appraisal, position audit and gap analysis; (c) Mission goals, identiication of key competitors, SWOT and environmental appraisal; (d) Mission, targeted ROI, manpower planning, position audit; (e) Mission, SWOT, competitive strategies, stakeholders position and institutional goal. Answer: (b) Strategic analysis is concerned with stating the position of the organization in terms of: mission, goals, corporate appraisal, position audit and gap analysis. 3. Strategic choice makes a statement about the corporate strategy as well as business strategy: (a) They are one and the same; (b) One is an external planning and another resource planning statement; (c) Corporate strategy is a general statement and business strategy deines how a SBU shall operate; (d) Both states certain course of action - one for the total unit and another for a particular businesaajnit; (e) One refers to the whole business and another helps in the formulation of marketing decisions. Answer: (a) Strategic choice makes a statement about the corporate strategy as well as business strategy : the former refers to the whole business while the latter helps in the formulation of marketing and other decisions. 4. 264 Board of directors has certain basic taks as follows: (a) To deine the corporate mission and stop irregular practice; (b) To design the course of strategic options and appointment of top management; (c) To set the ROI and other business performance targets; (d) To monitor plan and keep abreast of external threats; (e) To evaluate and monitor courses of actions. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Answer: (a) & (b) Board of directors has certain basic tasks as follows: • to deine the corporate mission and stop irregular practices; and • to design the course of strategic options and appointment of top management. 5. Degree of involvement of Board of Directors may vary from passive to active level. It may participate in one or more of the following activities (state which ones are more appropriate as a judicious mix) : (a) It constantly oversees the company’s mission, objectives and policies; (b) It approves issues like R&D, foreign collaborations, linkages with inancial institutions; (c) Capital budgeting, new product launch and competitive strategy building; (d) It tries to ensure that the company remains aligned with changing social,political and economic milieu; (e) Oversees only the inancial performance of the company. Answer: (a) & (b) Degree of involvement of board of directors may vary from passive to active level. It may participate in one or more activities. As a judicious mix, the more appropriate ones are :• it constantly oversees the company’s mission, objectives and policies; and • it approves issues like R&D, foreign collaborations, linkages with inancial institutions. 6. A strategic business unit (SUB) is deined as a division of an organisation : (a) That help in the marketing operation; (b) That enable managers to have better control over the resources; (c) That help in the choice of technology; (d) That help in the allocation of scarce resources; (e) That help in identifying talents and potentials of people. Answer: (b) A strategic business unit (SBU) is deined as a division of an organization: that enable managers to have better control over the resources. 7. The essential ingredients of Business Process Re-engineering are: (a) Continuous improvements of products, processes and technologies. (b) Advanced planning in the areas of technologies, processes and strategic partnerships etc. (c) Fundamental rethinking and radical redesign of business process to achieve dramatic results. (d) Generation, comparison and evolution of many ideas to ind out one worthy of development. (e) Identiication and selection of layouts most suited for products and processes. Answer: The essential ingredients of Business Process Re-engineering are: (c) Fundamental rethinking and radical redesign of business process to achieve dramatic results. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 265 Strtegic Managment – Objective Questions and Answers 8. Mckinsey’s 7-s framework consists of: (a) Structure, strategy, software, skills, styles, staff and supervision (b) Structure, strategy, systems, skills, styles, syndication and shared values. (c) Structure, strategy, systems, skills, steering power, styles and shared values. (d) Structure, strategy, staff, skills, systems, shared values, super ordinate goal. (e) None of the above. Answer: Mckinsey’s 7-s framework consists of: (d) Structure, strategy, staff, skills, systems, shared values, super ordinate goal. 9. Offensive strategy is a strategy: (a) For small companies that consider offensive attacks in the market. (b) For those companies that search for new inventory opportunities to create competitive advantage. (c) For the market leader who should attack the competitor by introducing new products that make existing ones obsolete. (d) For those companies who are strong in the market but not leaders and might capture a market share from the leader. (e) None of the above. Answer: Offensive strategy is a strategy: (d) For those companies who are strong in the market but not leaders and might capture a market share from the leader. 10. Benchmarking is: (a) The analytical too! to identify high cost activities based on the ‘Pareto Analysis’. (b) The search for industries best practices that lead to superior performance; (c) The simulation of cost reduction schemes that help to build commitment and improvement of actions; (d) The process of marketing and redesigning the way a typical company works; (e) The framework that earmarks a linkage with suppliers and customers; Answer: M Benchmarking is: (b) The search for industries best practices that lead to superior performance; 11. 266 SAIL’s famous advertising campaign of “there is a bit of steel in everyone’s life was meant to: (a) gain buyers awareness about its versatile product range; (b) create an image of superior performance: (c) inform new buyers about its special producis; (d) enhance product quality perception: (e) achieve its mission. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Answer: SAIL’s famous advertising campaign of “there is a bit of steel in everyone’s life” was meant to: (e) achieve its mission. Or (a) gain buyers awareness about its versatile product range. 12. Marketing Research studies are undertaken : (a) to measure brand loyalty of a class of consumers (b) to predict market potential of a product on a future date (c) to understand product-price relationships (d) to make out a case for revision of an existing strategy (e) all of the above Answer: (e) all of the above 13. Successful differentiation strategy allows the company to : (a) gain buyer loyalty to its brands (b) charge too high a price premium (c) depend only on intrinsic product attributes (d) have product quality that exceeds buyers’ needs (e) segment a market into distinct group of buyers Answer: (a) gain buyer loyalty to its brands 14. Organization culture is : (a) appreciation for the arts in the organization (b) ability of the organization to act in a responsible manner to its employees (c) combination of (a) and (b) above (d) deeper level of basic assumptions and beliefs that are shared by the members of the irm (e) none of the above Answer: (d) deeper level of basic assumptions and beliefts that are shared by the members of the irm. 15. Innovation strategy is : (a) defensive strategy (b) offensive strategy (c) responding to or anticipating customer and market demands (d) guerrilla strategy (e) harvesting strategy Answer: (c) responding to or anticipating customer and market demands OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 267 Strtegic Managment – Objective Questions and Answers 16. Intensity of competition is ——— in low return industries. (a) low; (b) non-existent; (c) high; (d) not important: (e) dependant on industry nature. Answer: (c) high 17. What are enduring statements of purpose that distinguish one business from other similar Firms? (a) Policies; (b) Mission statements; (c) Objectives; (d) Rules; (e) Nature of ownership. Answer: (b) Mission statements 18. Ansoff proposed that for illing the corporate planning gap, one follows four strategies namely. (a) market penetration, product differentiation, market identiication and diversiication; (a) market penetration, product development, marketing research and diversiication; (b) market penetration, product development, market development and diversiication; (c) market identiication, product development, positioning and diversiication; (d) differentiation, product innovation, market opportunity and diversiication. Answer: (c) market identiication, product development, positioning and diversiication 19. The essential ingredients of Business Process Re-engineering (BPR) are (a) continuous improvements of products, processes and technologies; (b) planning for the technologies, processes and strategic partnerships etc.; (c) fundamental re-thinking and radical redesign of business process to achieve dramatic results; (d) generation, comparison and evolution of many ideas to ind one worthy of development; (e) identiication and selection of lay-outs most suited for products and processes. Answer: (c) fundamental re-thinking and radical redesign of business process to achieve dramatic results 268 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 20. Directional Policy Matrix is the same as (a) the BCG model; (b) the 9-cell GE matrix; (c) the Life cycle portfolio analysis; (d) the PIMS matrix; (e) the 3 X 3 competitive positioning matrix. Answer: (b) the 9-cell GE matrix 21. For an actress in Bollywood, her pretty face would be a/an (a) Asset (b) Strategic asset (c) Core competency (d) Capability (e) All of the above Answer: (b) Strategic asset 22. For an entrepreneur (a) Vision is before the mission (b) Mission is before the vision (c) Both are developed simultaneously (d) Vision or mission are un-important issue (e) Proitability is most crucial. Answer: (a) Vision is before the mission 23. Which of the following market structures would be commonly identiied with FMCG products7 (a) Monopoly (b) Monopolistic competition (c) Oligopoly (d) Perfect competition (e) None of the above Answer: (b) Monopolistic competition OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 269 Strtegic Managment – Objective Questions and Answers 24. The Product Market matrix comprising of Strategies of Penetration, Market Development Product Development and Diversiication was irst formulated by (a) Ansoff (b) Drucker (c) Porter (d) Andrews (e) Prahlad Answer: (a) Ansoff 25. Indian Airlines decreasing the airfare on the Delhi-Mumbai sector following the introduction of the no frills airlines would be an example of (a) Cost Leadership (b) Price Leadership (c) Product Differentiation (d) Focus (e) Market Retention Answer: (b) Price Leadership 26. A Product line is a group of products that (1) are closely related (2) are marketed through the same channel (3) Perform a similar function for being sold to the same customers (4) All of the above Answer: (4) A product line is a group of products that are closely related are marketed through the same channel and perform a similar function for being sold to the same customers 27. The BCG growth matrix is based on the two dimensions: (1) Market Size and Market Share (2) Market Size and Proit Margins (3) Market Size and Competitive Intensity (4) None of the above Answer: (4) None of the above. BCG Growth Matrix is based on two dimensions - Market Growth Rate and Relative Market Share. 270 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 28. Outsourcing is the (1) Spinning off of a value-creating activity to create a new irm (2) Selling of a value-creating activity to other irms (3) Purchase of a value-creating activity from an external supplier (4) Use of computers to obtain value-creating data from the Internet Answer: (3) Outsourcing is the purchase of a value-creating activity from external supplier. 29. New entrants to an industry are more likely when. (1) It is dificult to gain access to distribution channels (2) Economies of scale in the industry are high (3) Product differentiation in the industry is low (4) Capital requirement in the industry are high Answer: (3) New Entrants to an industry are more likely when product differentiation in the industry is low. 30. The existence of price-wars in the airline industry in India indicates that (1) Customers are relatively weak because of the high switching costs created by frequent lyer progmms . (2) The industry is moving towards differentiation of services (3) The competitive rivalry in the industry is severe (4) The economic segment of the external environment has shifted, bat the airline strategies have not changed Answer: (3) The existence of price -Wars in the airline industry in India indicates that the competitive rivalrv in the industrv is severe. 31. The managerial task of implementing strategy primarily falls upon the shoulders of: (A) The Chief Executive Oficer (CEO); (B) First line supervisors, who have day-to-day responsibility for seeing that key activities are done properly; (C) All managers, each attending to what needs to be done in their respective areas of authority and responsibility; (D) All of the above. Answer: (C) All managers, each attending to what needs to be done in their respective areas of authority and responsibility. 32. Marketing Research Studies are undertaken: (A) to measure brand loyalty of a class of consumers; (B) to predict market potential of a product on a future date; (C) to understand product-price relationships; (D) all of the above. Answer: (D) all of the above. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 271 Strtegic Managment – Objective Questions and Answers 33. Price ixation for the irst time takes place when: (A) a company develops or acquires a new product; (B) introducing existing product into a new geographic area or a new distribution channel; (C) a service, the company bids for a new contract work; (D) all of the above. Answer: (D) all of the above 34. Which of the following market structures would be commonly identiied with FMCG products ? A. Monopoly B. Monopolistic competition C. Oligopoly D. Perfect competition Answer: (i) 35. B-Monopolistic Competition The product-market matrix comprising of strategies of Penetration, Market development. Product development and Diversiication was irst formulated by A. Ansoff B. Drucker C.Porter D. Prahlad Answer: (A) Ansoff 36. Typically Proits are highest in which stage of the industry life-cycle ? A. Introduction B. Growth C. Maturity D. Decline Answer: (B) Growth 37. The strategy which concentrates around a production market is: A. Vertical Integration B. Niche C. Horizontal Expansion D. Diversiication Answer: (B) Niche 38. ‘Corporation vision’ is the same as (A) Corporate dream (B) Corporate mission (C) Corporate goal (D) Corporate strategy Answer: (A) Corporate dream 272 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 39. ‘Niche’ is similar to the (A) Growth strategy (B) Milking strategy (C) Flanking strategy (D) Survival strategy Answer: (C) Flanking strategy 40. Successful ‘differential strategy’ allows a company to (A) Gain buyer loyalty to its brands (B) Charge too high a price premium (C) Have product quality that exceeds buyers’ needs (D) Depend only on intrinsic product attributes. Answer: (A) Gain buyer loyalty to its brands 41. For an actor in Bollywood, his outstanding performance would be a/an (A) Asset (B) Strategic asset (C) Core competency (D) Capability Answer: (C) Core competency 42. Intensity of competition is in lower-return industries (A) lowest (B) non-existent (C) highest (D) not important Answer: (C) Highest 43. A supplier group is powerful if (A) It is not concentrated (B) Offers unique products (C) Its customers can backward integrate (D) There are no switching costs Answer: (B) Offers unique products 44. A company’s actual strategy is (A) mostly hidden to outside view and is known only to top-level managers (B) typically planned well in advance and usually deviates little from the planned set of actions and business approaches because of the risks of making on-the-spot changes (C) partly proactive and partly reactive to changing circumstances (D) mostly a function of the strategies being used by rival companies(particularly those companies that are industry leaders) Answer: (C) Partly proactive and partly reactive to changing circumstances OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 273 Strtegic Managment – Objective Questions and Answers 45. The reason for failure of Strategic Management may be ascribed to A. Over-estimation of resource competence B. Failure to obtain senior management commitment C. Failure to obtain employee commitment D. All of the above Answer: (D) All of the above 46. Blue Ocean Strategy is concerned with A. moving into new market with new products B. creating a new market places where there is no competition C. developments of products and markets in order to ensure survival D. making the product unique in terms of attributes Answer: (B) creating a new market places where there is no competition. 47. For an actor in Bollywood, his outstanding performance would be a /an A. Asset B. Strategic Asset C. Core competency D. Capability Answer: (C) Core competency 48. A Question Mark in BCG Matrix is an investment, which A. Yields low current income but has bright growth prospects. B. Yields high current income and has bright growth prospects. C. Yields high current income and has bleak growth prospects. D. Yields low current income and has bleak growth prospects. Answer: (A) Yields low current income but has bright growth prospects. 49. 274 The strategy of the TATAgroup in India could be viewed as a good example of A. Conglomerate diversiication B. Market development C. Cost Leadership D. Concentric diversiication. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT Answer: (A) Conglomerate diversiication. 50. Risk Management Strategies are A. Avoid Risk, Reduce Risk, Retain Risk, Combine Risk B. Transfer Risk, Share Risk and Hedge Risk C. Both (A) and (B) D. None of the above. Answer: (C) Both (A) and (B) 51. Business Process Re-engineering is A. Eliminating loss-making process; B. Redesigning operational processes; C. Redesigning the product and services; D. Recruiting the process engineers. Answer: (B) Redesigning operational processes. 52. The best test of a successful strategy implementation is A. Whether the structure is well matched to strategy; B. Whether the strategies and procedures are observed in a strategy supportive fashion; C. Whether actual organizational performance matches or exceeds the targets spelt out in the strategic plan; D. Whether it is made after the strategy is formulated, so that it is supportive to the strategy. Answer: (C) Whether actual organizational performance matches or exceeds the targets spelt out in the strategic plan. 53. Offensive strategy is a strategy A. For small companies that consider offensive attacks in the market; B. For those companies that search for new inventory opportunities to create competitive advantage. C. For the market leader who should attack the competitor by introducing new products that makes existing ones obsolete; D. For those companies who are strong in the market but not leaders and might capture a market share from the leader. Answer: (D) For those companies who are strong in the market but not leaders and might capture a market share from the leader. OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT 275 Strtegic Managment – Objective Questions and Answers state whether the following statement is True or False: 1. “Dogs” are the products in a high-growth market but where they have a low market share. 2. ‘Dogs’ are products with a low share, negative growth and negative cash low. 3. Penetration Pricising is the use of price to drive a competitor out of business. 4. “Strategic Management” is concerned with the formulation of possible courses of actions, their evaluation and the choice between them. 5. ‘cash cows’ are products in a high-growth market but where they have a low market share. 6. ‘Divestment’ is pulling out from certain product market areas. 7. Business Process Re-engineering is an important ingredient of Reverse Engineering. 8. Synergy signiies a condition where the whole is greater than the sum of its parts. 9. Brand equity is the added value to the shares held by the equity share-holders of a company. 10. “Beanchmarking” is the simulation of cost reduction schemes that help to build commitment and improvement of actions. 11. “Balanced Strategy” is about translating the version, communicating and linking, business planning, target setting, etc. Answer: 1. False — As per BCG Matrix, “Dogs” are units with low market share in a mature, slow-growing industry. 2. False — The correct statement is: ‘Dodos’ are products with a low share, negative growth and negatige cash low. 3. False — The correct statement is: predatory Pricing is the use of price to drive a competitor out of business. 4. False — The appropriate term is ‘Strategic choice’, instead of ‘Strategic management’. Strategic management concersn itself with corporate values, managerial capabilities and organizational responsibilities and systems in a way that links strategic and operational decision making leading to an effective strategy or strategies. But the given staement is indicative of choice of startegy. 5. False — The appropriate term is ‘question Marks’ instead of ‘Cash Cows’. Cash cows have high market share in low growth market. Hence the given statement in false. 6. True 7. False 8. True 9. False 10. False — Benchmearking is the search for industries best practices that leads to superior performance. 11. False — “Balanced Score Card” is about translating the vision, communcating and linking, business planning, target setting, etc. 276 OPERATIONS MANAGMENT & STRATEGIC MANAGEMENT